A debt service coverage ratio (DSCR) mortgage, also known as an investor cash flow mortgage, enables you to finance an investment property using rental income instead of your personal income. In short, a DSCR mortgage enables you to purchase or refinance a rental property without providing your tax returns, W-2s, pay stubs or other personal and financial documents that are required for a standard mortgage. In fact, most DSCR lenders do not verify your employment when you apply for the loan.
Other benefits of a DSCR loan include more flexible qualification guidelines in other areas such as property type and mortgage program. Continue reading to learn more about the DSCR program, including positives and negatives and how to apply.
To qualify for a DSCR loan, the rental income generated by the property must meet or exceed the lender‚Äôs coverage ratio requirement. The coverage ratio equals monthly rental income divided by the mortgage payment and typically ranges from 1.0x to 1.5x, depending on the lender and borrower.
For example, if a lender‚Äôs debt service coverage ratio is 1.0x and the property produces $5,000 in monthly rent, the maximum mortgage payment permitted is also $5,000. If the DSCR is 1.5x, the maximum mortgage payment is $3,333. The specific loan amount you qualify for is based on the mortgage rate and program.
Because qualifying for a DSCR mortgage depends primarily on the rental income produced by the property instead of your personal income, the application process is streamlined and may take less time as compared to a regular investment property mortgage. The DSCR program is well-suited for someone who is looking to acquire or refinance an investment property but does not have enough personal income to get approved or does not want to provide their tax, financial and employment documents.
The downsides of a DSCR loan include paying a higher mortgage rate and being required to make a higher down payment in some cases.
DSCR mortgages are provided by different types of lenders, including mortgage brokers. We recommend that you contact multiple lenders in the table below to determine program availability and to review loan terms. Qualification guidelines vary by lender, plus, shopping several lenders is the best way to find the lowest rate and fees.
The coverage ratio, which is the most important qualification requirement for a DSCR mortgage, is calculated using rental income according to a signed lease agreement or projected rental income according to the rent schedule from a property appraisal report if no lease is in place. For single family property, the rent schedule is known as a form 1007 and for two-to-four unit property, the lender usually requires a small residential income property appraisal report, which is called a form 1025.
As noted above, the coverage ratio usually ranges from 1.0x to 1.5x depending on the lender, which means the actual or projected monthly rental income must be at least equal to 1.0x to 1.5 of the mortgage payment. In some cases, the coverage ratio is lower or not required at all if you make a down payment of at least 30% and you should confirm this point with the lender.
Please note that some lenders charge a higher mortgage rate if an appraisal report instead of signed lease agreement is used to determine the coverage ratio.
Loan-to-Value (LTV) Ratio
The maximum loan-to-value (LTV) ratio for a DSCR loan is usually 80%. This is moderately lower than the maximum LTV ratio for a standard single unit investment property purchase loan but higher than the ratio for a standard rental property refinance. The lower the LTV ratio, the higher your down payment or, for a refinance, the more equity you are required to have in the property.
Most DSCR lenders allow all types of loan programs including fixed rate, adjustable rate (ARM) and interest only mortgages.
Maximum Loan Amount
The maximum mortgage amount allowed depends on the lender but can be as high as $2 million in some cases, which is significantly higher than the maximum loan amount for a standard investment property program.
Type of Refinance
Most DSCR programs offer purchase loans as well as rate and term and cash-out refinance options. In some cases you may be able to take more cash out of an investment property with a DSCR mortgage than with a standard non-owner occupied loan.
Unlike standard investment property mortgages, DSCR loans may include a prepayment penalty. We recommend that you carefully review your loan terms to understand any fees and penalties you may be required to pay.
DSCR mortgages typically permit multiple types of properties that are not allowed with standard investment property loans, including properties with more than four units and non-warrantable condos. Properties can also be owned by an LLC, which is not allowed under regular mortgage guidelines. Additionally, most lenders do not limit the total number of rental properties you have financed, which may enable you to grow your property portfolio faster.
Use our personalized mortgage quote service to compare refinance quotes from top-rated lenders. Our quote form is free, easy-to-use and does not affect your credit.
Minimum Credit Score
The minimum credit score required for a DSCR mortgage varies depending on the lender and other factors but is typically 640, which is similar to the score required for a standard investment property loan.
Borrower Debt-to-Income Ratio
Because the DSCR program uses a coverage ratio to determine if you qualify, your personal debt-to-income ratio is not factored into your application. This also means that lenders do not verify your income or employment when you apply for the loan, which reduces the documentation requirements.
Use the FREEandCLEAR Lender Directory to search over 4,000 lenders by loan program and lender type. For example, you can search for mortgage brokers in your area that offer investment property loans.
DSCR mortgage rates tend to be 1.000% to 2.000% higher than standard investment property rates. There tends to be a wider range in pricing for DSCR loans, so we recommend that you compare mortgage quotes from multiple lenders to find the best terms. As noted above, the interest rate may be higher if no lease is in place on the property and the projected rental income is based on an appraisal report.
Closing costs for DSCR loans are comparable to standard rental property mortgages and include lender, appraisal, title and escrow fees. Again, shopping multiple lenders should enable you to find the lowest costs.About the author