DSCR Loan

What Is A DSCR Loan?

A DSCR loan is a type of non-QM loan for real estate investors. Lenders use a DSCR to help qualify real estate investors for a loan because it can easily determine the borrower’s ability to repay without verifying income.

Debt Service Coverage Ratio: No-Income Mortgage Loan

Qualify for a home loan without using your tax returns. As a real estate investor, you can avoid high rates and high points of private loans, lengthy approval processes, and strict lending criteria with a debt service coverage ratio loan. 

This is a type of no-income loan, and you can qualify for a loan based on your property’s cash flow, not your income. 

Securing a debt service coverage ratio loan can help you expand your investment portfolio easier than ever before.

How Does a DSCR Loan Work?

Because real estate investors write off expenses on their properties, some may not qualify for a conventional loan. The debt service coverage ratio loan allows these individuals to qualify more easily. This is because the lenders do not require proof of income via tax returns or pay stubs that investors don't have or don't represent their true income due to write-offs and business deductions.

 Benefits of DSCR Loans for real estate investors

  • Potentially quicker closing times

  • No income or job history verification required

  • No limit on the number of properties

  • Loan amounts up to $5,000,000

  • Unlimited cash-out

  • As little as 20% on down payments

  • Interest-only loan option available

  • Suited for new and seasoned real estate investors

  • Both long-term and short-term rentals are eligible (Airbnb, VRBO, etc.)

  • No reserves are required on cash out loans, 6 months are required on all other loans unless the DSCR ratio is less than 1.

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. A Lender uses DSCR to analyze how much of a loan can be supported by the income coming from the property. Additionally, DSCR helps a lender determine how much income coverage there will be at a specific loan amount.

What Is a Good DSCR Ratio?

Many lenders will require a 1.25 DSCR to qualify for a DSCR mortgage loan. However, Griffin Funding allows real estate investors to qualify for a loan with a DSCR as low as .75, so it can qualify with the cash flow of your property. 

Please note that interest rates are better on DSCR ratios of 1 or above. Moreover, a DSCR ratio of less than 1 requires 12 months of reserves. When considering what a good DSCR ratio is, lenders need to ensure that a borrower is able to pay back the loan.

DSCR Formula Calculation

The debt service coverage ratio formula is the annual gross rental income divided by the debt obligations of the property.

Annual Gross Rental Income/Debt Obligations = Debt Service Coverage Ratio

  1. To find your Gross Rental Income, we take your annual rental income based on your lease agreement and the appraiser's comparable rent schedule (form 1007) and use the lesser of the two. In some cases, if you can prove a twelve-month history of rental income, you can qualify off of that rather than the appraiser's market rent.

  2. Next, you'll need to find your annual debt. Your annual debt for loan qualification purposes equals the total annual principal, interest, taxes, insurance, and HOA (if applicable) payments. Annual Debt = Total Annual PITI payments.

  3. Next, you’ll divide your annual gross rental income by your annual debt for your ratio. DSCR = Annual gross rental income/Annual Debt

Please note that Net Operating Income (NOI), Capitalization Rate (Cap Rate), Cash on cash return (COCR), Return on Investment (ROI) are not considered for mortgage loan qualifying purposes.

 

Example of Debt Service Coverage Ratio Calculation

A real estate investor might be looking at a property with a gross rental income of $50,000 and an annual debt of $40,000. When you divide $50,000 by $40,000, you get a DSCR of 1.25, which means that the property generates 25% more income than necessary to repay the loan. This also means a positive cash flow in the lender's eye.

Why Does DSCR Matter?

The DSCR lets the lender know how to determine a borrower’s ability to pay off their DSCR mortgage. Lenders must forecast how much a real estate property can rent for so that they can predict a property’s rental value.

If you have a DSCR of less than 1.0, it means that a property has the potential for negative cash flow. DSCR loans can still be made on properties with less than a 1 ratio. However, you can get purchase loans for home improvements, upgrades, and remodeling to increase the monthly rent. Alternatively, you can use it to purchase homes with high equity and the potential for higher rents in the future. You also can potentially get the property above a 1.0 ratio with a DSCR interest-only loan.

 

Non-QM Loans for Borrowers with Low DSCR

Griffin Funding offers these loans for borrowers with a DSCR as low as .75. If you fall below that requirement, you still have tons of other loan options available to you, including the following Griffin Funding non-QM mortgages:

  • Asset-Based Loans: Asset-based mortgages are another loan product for investors who want to qualify for a loan without taking income into account. These loans allow you to use your assets instead of your income to qualify, which means you won’t have to provide a tax return or proof of income.

  • Bank Statement Loans: A bank statement loan allows investors to verify their income using bank statements instead of tax returns. These are beneficial for investors who have write-offs and deductions on their taxes, making lenders believe that they bring in less money than they actually do each month.

  • Interest-Only Loans: Interest-only loans offer investors the option to pay lower monthly payments for the first portion of the loan. During this time, payments only apply to interest, not the principal balance.

  • Recent Credit Event Loans: A recent credit event loan allows borrowers to qualify for a loan despite recent credit events like bankruptcy, short sale, foreclosure, and divorce so that you can start rebuilding your investment portfolio as soon as possible.