DEBT SERVICE COVERAGE RATIO
Investment Homes and/or Income-Producing Properties
DSCR LOANS DSCR (Debt Service Coverage Ratio) loan, also known as an Investor Cash Flow loan, is a type of non-QM loan that enables qualification for a home loan without depending on personal income.
DSCR loans are particularly well-suited for real estate investors as they provide financing based on the rental property’s cash flow, rather than personal income tax returns or other financial documents. Here is a concise overview of the operation and qualifications necessary for DSCR loans. These loans are commonly utilized to finance the acquisition or refinancing of investment properties or commercial real estate. DSCR loans differ from traditional loans by focusing on the property’s cash flow and generated income instead of the borrower’s personal income and credit history, offering significant benefits to investors. The essential aspect of a DSCR loan is the minimum Debt Service Coverage Ratio required, which reflects the property’s capacity to cover its debt obligations. The DSCR is calculated in the following manner: DSCR = Net Operating Income (NOI) / Total Debt Service
- Purpose of DSCR Loans:
- DSCR loans are frequently utilized to finance the purchase or refinance of investment properties and commercial real estate.
- These loans permit borrowers to secure financing based on the property’s cash flow instead of depending exclusively on income tax returns or other financial statements.
- Cash Flow Assessment:
- The crucial element of a DSCR loan is the required minimum Debt Service Coverage Ratio (DSCR).
- The Debt Service Coverage Ratio (DSCR) indicates a property’s ability to cover its debt obligations.
- It is calculated by dividing the net operating income (NOI) by the total debt service (TDS).
- Qualifications:
- Lenders generally require a minimum Debt Service Coverage Ratio (DSCR), typically between 1.2 and 1.3, to approve a loan.
- A higher DSCR indicates better cash flow and a stronger ability to cover debt payments.
In summary, DSCR loans provide real estate investors with a financing option that aligns with the property’s income-generating potential.
Qualify for a DSCR Loan
To qualify for a DSCR loan, borrowers must meet certain criteria for both the borrower and the property. These requirements are important for the eligibility for a DSCR loan. The process of approval focuses on verifying a borrower’s ability to repay the loan. While specific requirements vary by lenders, most borrowers can expect to meet the following criteria:
DSCR ratio of 1.0 or higher, credit scores beginning at 620 (though some lenders may require higher scores), a 20% down payment (some lenders may accept less), a minimum loan amount of $100,000, and a maximum loan amount of $3 million.
These criteria can differ among types of loans, and some loan categories may be flexible with borrowers who have varying credit histories, depending on the property. At IFG, we guide you to the perfect scenario for a successful result.
Let’s talk about property – the main concern to secure a loan is whether the property you choose produces sufficient income to service its debt.
Remember, DSCR loans are specifically for income-generating investment properties. They can be single-family units or multi-unit complexes. Historically, lenders limited loans to structures with four units or fewer, however, IFG has built a relationship with lenders who have recently begun financing larger multi-unit properties.
These are some of the considered factors:
A loan-to-value (LTV) ratio of 80% or lower is often required, along with an appraisal report to assess the property’s value. Lenders typically expect an LTV of 80% or lower, meaning the loan cannot exceed 80% of the property’s appraised value.
Therefore, an appraisal of the property is necessary before a loan can be approved. This will be an out-of-pocket expense for the borrower, yet it is crucial for securing a loan.
