Unlock Your Path to the Perfect Mortgage Solution

Debt Service Coverage Ratio (DSCR) Loan:

Use Rental Income to Qualify for Investment Properties.

A DSCR loan allows real estate investors to secure financing based on the rental income of a property rather than their personal income. If you cannot qualify for a conventional loan, DSCR loans are a great option.

What Is the Debt Service Coverage Ratio (DSCR)?

The debt service coverage ratio measures a property’s annual gross rental income against its annual mortgage debt, including principal, interest, taxes, insurance, and HOA (if applicable). Lenders use DSCR to analyze how much of a loan can be supported by the income coming from the property and to determine how much income coverage there will be at a specific loan amount.

Step 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 LTR or STR rental income, you can qualify off that rather than the appraiser’s market rent.

Step 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.

Step 3:

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

Frequently Asked Questions

What is a DSCR loan?

A DSCR loan is a measure of the gross rental income against the current debt obligations of an investment property. These loans are alternative mortgages used by real estate investors to qualify for financing based on the property’s income, without personal income verification.

What type of property can I purchase with a DSCR loan?

The DSCR loan makes it possible to buy income properties for either short-term or long-term rentals. You can even purchase a secondary residence if you can prove it will generate sufficient income.

For example, you can maximize rental income on a permanent residence through seasonal rentals and short-term stays. Listing the property on Airbnb, renting out rooms to long-term tenants, or renting out portions of the property for events are all ways to generate income to meet your debt service requirement.

Why does a DSCR change over time?

The DSCR measures your ability to repay a mortgage loan at a given point in time. A higher ratio indicates more cash flow and a higher likelihood of repaying a new mortgage loan. However, if you take on new debt or the rental income on your existing properties increases or decreases, it can change your debt service coverage ratio for the better or worse.

As your real estate portfolio grows, you will have higher or lower cash flow at various times. This makes it important to time your application for a DSCR loan wisely.

Interest rates will also affect your ability to repay a new loan. Higher interest rates increase monthly expenses and lower DSCR. Alternatively, lower interest rates can increase the DSCR.

Testimonials

From start to finish, the mortgage process was seamless. The team provided clear guidance, answered all my questions, and helped me secure a fantastic rate. I felt confident and supported every step of the way!

— Mark T.

Working with this lender made my refinancing process so easy! Their transparent approach and personalized options were exactly what I needed. I’m now saving money each month, and the entire experience was stress-free.