DSCR Mortgage for Investors
Qualify with Income from the Rental Property
Many real estate investors who are buying an investment property depend on rental income from the purchase of their property. The lender has the same concern. Will the income cover the new mortgage payment? When it does, you're sitting in a winning position.
What is a DSCR Loan?
A DSCR loan is a mortgage loan offered to a borrower who uses the property's debt service to qualify. Mortgage companies may refer to it as a no doc investment property loan because the borrower's income and employment are not disclosed.
How does a DSCR loan work?
A DSCR loan is a mortgage offered on an investment rental property. These loans are typically offered on 30-year fixed rate and 7 or 10 year fixed hybrid ARMs on 30 year terms. Borrowers qualify using the rental income from the subject property to buy or a rental property they already own, their own credit, and liquid reserves. Their own personal or business income cannot be used to qualify. If other income is needed they'll need to use a different loan program.
This forumula is for 1-4 unit residential properties. For commercial real estate the DSCR ratio is calcutaed differently.
In 5 steps, here’s how a DSCR loan works.
- You apply for a rental property loan to get up to 80-percent loan to value of your investment.
- You calculate if the rental income will cover the new proposed mortgage payment (vacant or leased).
- The lender has an appraisal done on the property and the appraiser confirms the local market rents.
- You receive a loan based on the appraised value and rental income based on either the current lease or market rents to cover the new full mortgage payment.
- Your tenant is essentially repaying the loan and the property's rent and/or value appreciates over time.
Borrower(s) to provide the lender copies of the most recent lease agreements if the property is tenant occupied. If is not occupied the lender will use what's in the appraisal report from a local market rent survey.
Ideally, the lender will use the current lease agreements provided and use that for cash flow. It doesn't matter if the tenant is leaving soon, behind on the rent, or being evicted. Your personal income will not be provided or used to qualify.
What is the minimum down payment on a DSCR loan?
Borrower(s) may be eligible to put down as low as 15-percent subject to the cash flow of the rents and the borrower's credit score and history. In general most real estate investors (new and experienced) bring in a 20-50 percent down payment because if the rent's don't cover the new mortgage then you may have to put more money down or "if approved" accept a higher interest rate and fees.
If the property does not cash flow (like many in California) a DSCR loan can still be approved with a 30% down payment.
Review these financing scenarios
The following are three examples of ways to use a DSCR loan. (Note: These are merely hypothetical to drive the point home how a DSCR loan could benefit you.
Example #1: Multifamily property. Let's assume the property you want to buy is a triplex (three units) for $750,000, and you have $187,500 which is a 25-percent down payment. The rents on each unit are $1,400 per month totaling $4,200. The new mortgage payment is $3,500 plus $500 for property taxes and insurance totaling $4,000 per month.
In this scenario, the property generates $4,200 and your total payment is $4,000 so you'd likely be approved for a DSCR loan. After the property appreciates more and/or the rents increase in the coming years you can refinance the loan into a much better interest rate or sell the property. In either outcome it's positive for you.
Example #2: You want to buy a home in a city with strong year round rental demand or seasonal demand. Either choice sounds good to you. The appraiser will make notes in their report to confirm what the market will pay.
Are you aware if you already have a rental property that receives short term rental income such as from AirBnb or VRBO some DSCR loan programs use the short term rental income instead of the annual income to qualify.
The reasoning comes from common sense that in some parts of the country short term rentals can generate income equal to or 2-3x of the normal annual rent. Of course you'll need to show prooof with income reports from one of those providers on a refinance. This loan is win-win. when it comes to flexibility.
Hopefully these examples show you how simple it is finance a rental property.
Ideally, you want to have your DSCR loan approved and have the funds within 1-2 weeks before you buy the next home. If you put in an offer to buy a home, then apply for a dscr loan you are putting more pressure on yourself as the process can take 2 to 3 weeks.
Pros and cons of the residential DSCR loans
There are pros and cons to consider when using a DSCR loan to buy rental property. Here's an honest look at the advantages and disadvantages of these no doc investment property loans.
- Very little documentation– Let's face it. Providing your tax returns to an underwriter can raise new questions about eligible income. Let's say you received a big bonus last year but not the two previosu years. The underwriter will not allow it as qualifying income because you need 2-3 years of bonus income. A DSCR loan helps you avoid all that frustration.
- Speed – Since DSCR loans are based on your property's income and title is secured by that property, they usually get approved and funded very quickly as in 2-3 weeks. There's not any tax returns or personal income to debt ratios to calculate for qualifying.
- Interest rates– – DSCR loans have higher interest rates than a typical non-owner occupied loans.
- Higher fees – the fees are much higher ranging from 1.5 - 2 percent of the loan amount.
- Credit score– you'll likely need a credit score of 660 or higher to be eligible
- Vacancies- your mortgage payment wil be higher until you rent the unit(s)
Is it easy to get approved?
The truth is as long as you have a good credit score and the local rental market is stable it's an easy process. Your personal income and current job are not a factor or even disclosed. You may still be approved subject to your credit report.
The typical requirments are:
- FICO credit scores above 680
- Minimum loan amount of $200,000 up to $3 million
- No derogatory housing credit in the last 24 months
- No Foreclosures or bankruptcies in the last 4 years
Which type of properties are eligible?
To give you an idea, here’s what are allowed. If is not listed below then it is not allowed
- Single family homes
- 2-4 unit residential properties; Duplex, Triplex, or Fourplex
- 5 to 8 units (must be all residential)
How much does a DSCR loan cost?
Because the loan is largely based on the subject property's market ren the fees range from 1.50 to 3% of the loan amount.
To give you an idea, here’s how much you need to have on a $500,000 loan:
- credit report: $26 (or up to $52 for 2 borrowers)
- appraisal: $500-$1,000 (price depends on appraiser's bids in your area)
- underwriting: $1,250-$1,650 (depending on the program)
- origination fee: 1.50-2% of loan amount ($500,000*.0175 = $8,750 )
- Optional: rate buydown fee: 1% of loan amount (loan of $500,000*.01 = $5,000)
Who should get a DSCR loan?
You should strongly consider getting a DSCR loan if these 3 factors apply to you.
- your income tax returns do not show the income to qualify for conventional financing
- you switched from W2 salry to self-employed or vice-versa or are unemployed
- you don't want the hassle with providing your income documents
Here's what to look for from a residential DSCR loan lender
Although a mortgage lender offers DSCR loans it does not mean they'll approve your application. These type of loans made their debut in the last few years and are not a specialty of among the cookie-cutter residential loan officers who mainly originate conforming or government loans. It’s best to use someone who has done this loan many times and has a pool of lenders who specialize in debt service coverage mortgages loans.
- Low interest rate relative to other dscr lenders
- Interest only payment option
- Speed to closing
- Flexibility to extend loan term
- Experience and easy to reach
Which states is this available in?
We will have a licensed loan officer help you if the property is located in Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho, Maryland, New Mexico, North Carolina, Oregon, South Carolina, Washington, Utah, Tennessee, and Texas.
**Last updated Nov. 11, 2022
Prepayment Penalty : This is optional but may require a higher rate or small fee.
Rates range from 6.50% on a 7 Year ARM and up on a 30 year fixed mortgage and are subject to change with market conditions.