DSCR

A debt service coverage (DSCR) loan is one that qualifies borrowers through an investment property’s cash flow rather than the borrower’s income. DSCR loans — also known as investor cash flow loans — are frequently used by real estate investors to qualify for mortgages and buy investment properties.

The debt service coverage ratio (DSCR) is the ratio of an investment’s net operating income to its total debt service. It is a way of determining whether a borrower has enough cash flow to pay its current debt obligations.

DSCR can have applications in business, government, and personal finances. Like DSCR loans, this ratio is often used in real estate to determine whether an investment property’s cash flow can cover its mortgage payments.

The higher the DSCR, the better the ratio. A DSCR above 1 means that an investment property has positive cash flow and enough net operating income to cover its debts. A DSCR below 1 means it has a negative cash flow, and not enough income to pay its debts. As a general rule, anything above 1.25 is considered a good DSCR.

When your borrower applies for a mortgage loan, we look at their income to determine how much they can afford as a monthly payment. The key figure examined is the debt-to-income ratio (DTI), which is the percentage of their monthly income that goes toward debt.

But in the case of investment properties, A&D Mortgage offers DSCR loans. Rather than looking at a borrower’s income, we consider the expected monthly rent from the property. And instead of using the DTI to determine eligibility, we look at the DSCR.

If the rental income is more than enough to pay the mortgage payment, then the borrower may qualify. If the rental income does not cover the mortgage payment, we will probably deny the application.

While DSCR loans may not have the exact same requirements as Conventional mortgages, there are still guidelines real estate investors will have to meet to qualify.

Unlike Conventional mortgages, DSCR mortgages are not backed by entities like Fannie Mae and Freddie Mac. Therefore, there are no standardized requirements. However, there are a few things that we will look at.

• DSCR. Generally speaking, most lenders require a DSCR between 1 and 1.5 to qualify for a DSCR loan, with the most common minimum requirement being a DSCR of 1.25. We go as low as zero!
• Credit score. Each lender will require a specific credit score, with minimum requirements typically ranging from 620 to 700. We go down to 620.
• Down payment. Most DSCR loans have a maximum LTV of 80% — you will need a down payment of at least 20% to qualify. We offer LTVs up to 80%!
• Cash reserves. Like other investment properties, DSCR loan lenders require a certain amount of cash reserves, often equal to six months of payments. We only require 3 months of reserves!
• Loan amount. The maximum they can borrow for a DSCR loan depends upon the lender, but many financial institutions offer loans up to $2 million. We offer a maximum of $2.5 million!
• Prepayment penalty. Unlike Conventional loans and typical investment property loans, many lenders charge prepayment penalties on DSCR loans. We can offer up to 5 years of prepayment penalties!

Property eligibility. DSCR loans can be used for investment properties with one, two, three, or four units. In certain cases, we have been able to approve up to eight units!

DSCR loans have many advantages including:

• Different eligibility requirements. DSCR loans use the rental income from a property, rather than the borrower’s income to qualify. This means that they can buy an investment property even if their income makes them ineligible.
• No limit to the number of loans. There is a limit to how many rental properties a borrower can buy with Conventional mortgages, but they can generally take out as many DSCR loans as they want.
• Quicker closing. DSCR loans may have quicker closing times than Conventional mortgages because of simplified documentation.
• No employment verification. Because the borrower’s income is not used to qualify for a DSCR loan, there is no employment verification required.