What is a DSCR Loan?

Debt Service Coverage Ratio (DSCR) mortgages have become a popular choice for non-QM loans, largely because they are easy to qualify for. These loans consider the potential income a property could bring, rather than the income that an investor is making right now. Unlike most mortgages, the DSCR Loan programs do not require you to provide or verify your personal income or employment history. Instead, DSCR Loans factor the rent compared to the Principal, Interest, Taxes and Insurance (PITI) of the mortgage payment to determine if there is adequate cash flow to qualify. 

DSCR Loans

Real estate investors use DSCR Loans to purchase property without having to show proof of income. This key feature makes DSCR Loans geared toward real estate investors, not borrowers looking to purchase a residential property for personal use. 

Investors who already own property may also use this type of loan to refinance and get cash out of their investment(s). Then, the cash can go towards home renovations or to buy additional investment properties.

What’s The Ratio?

DSCR stands for Debt Service Coverage Ratio, typically calculated on a per-year basis, which lenders use to determine your eligibility to receive the loan. The DSCR is a ratio of a property’s annual net operating income and its annual mortgage debt, including principal and interest. There is no income verification or approval process with this kind of loan since your property's cash flow determines your loan eligibility completely. 

This DSCR helps lenders determine whether you will be able to pay back your loan and interest on time. The ratio’s calculation generates a debt-to-income ratio and the higher, the better, with a competitive debt service coverage ratio of 1.25 or above. 

DSCR Loans & Credit Scores 

DSCR Loans will take into account your credit score as another factor to account for the maximum Loan To Value and interest rate offerings. If you are on the lower end of credit scores, you to be more limited on the maximum loans you can acquire and offered higher interest rates.

Pros & Cons

These loans may require a larger down payment or higher interest rate from than a traditional mortgage, which means you will pay more overall, and you need to have more capital upfront.

But DSCR Loans are a great option if your rental properties make up most of your income stream since your yearly tax filings do not accurately reflect your income and may disqualify you from accessing other types of loans.

Also, there is no limit on how many DSCR loans you can have at one time. This allows you to use these loans to build an investment portfolio quickly, as long as you can qualify for each new loan you take on.

If you are looking to qualify for a home loan without using your tax returns, a Debt Service Coverage Ratio mortgage may be the perfect non-QM loan to help you reach your property investing goals.

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