What Is the Debt Service Coverage Ratio (DSCR)?
The Debt Service Coverage Ratio is a ratio of a property’s annual net operating income and its annual mortgage debt, including principal and interest. Lenders use DSCR to analyze how much of a loan can be supported by the income coming from the property as well as how much income coverage will be needed at a specific loan amount. This loan is primarily used to finance residential investment properties.
Who Does the Loan Benefit?
A DSCR loan is a type of non-QM loan for any borrower who is self-employed or a real estate investor looking to purchase an investment property. Mortgage lenders use DSCR to help qualify a borrower for a mortgage loan because it can easily determine the borrower’s ability to repay without verifying income.
How Does it Work?
Real estate investors often write off their expenses on their properties. Because of this, some may not qualify for conventional mortgage loans since their true income isn’t represented due to write-offs and business deductions. The DSCR ratio doesn’t require proof of income, tax returns, or pay stubs which many self-employed investors often don’t have.
Lenders use the DSCR to forecast how much a real estate property can cash-flow for, so that they can predict a property’s rental value. This rent projection is the key metric used to underwrite/approve the loan and better determine what a borrower can borrow.
Essentially, the key requirement for this loan is the down payment, as any property can meet a rental breakeven point if there is enough equity to put down.
What are the Requirements for a DSCR Loan?
To qualify for a DSCR loan, the borrower must meet the lender’s minimum credit score requirement, and the rental income generated by the property must meet or exceed the lender’s coverage ratio requirement.
The coverage ratio equals the monthly rental income divided by the mortgage payment, and typically ranges from 1.0x to 1.5x, depending on the lender and borrower.
What is a Good DSCR ratio?
Many lenders will require a 1.25x DSCR to qualify for a DSCR mortgage loan. Generally, a DSCR of less than 1.0x means that a property has potential for negative cash flow, but this can be combated with an increase in monthly rent. Every lender’s ratio requirements will vary – it’s important to consult with your lender first.
Here is a hypothetical example of how DSCR is calculated:
Debt Service Coverage Ratio (1.25%) = Expected Gross Monthly Rent ($5,000) / Total Monthly Mortgage Payment including property taxes and insurance ($4,000)
Overall Benefits of the DSCR Loan:
- No income or job history verification required
- Minimum credit score required
- Eligible for both long-term and short-term rentals (think AirBnb, VRBO, etc.)
- No limit on the number of investment properties
If you have any questions about the DSCR No-Income Mortgage Loan and if it’s right for you, please contact us at (760) 930-0569 and one of our loan consultants will be happy to assist you.