How does a DSCR loan program work?
What is a DSCR loan?
A debt service coverage ratio (DSCR) mortgage loan allows you to finance an investment property. While a traditional residential mortgage is based on your ability to personally cover the monthly payments with verifiable income like pay stubs, W-2s, tax returns, and bank statements, this type of loan enables you to use the cash flow generated by the property you’re buying.
It’s a vastly different type of home loan than you’d seek for your primary residence. DSCR loan programs are considered non-conforming so they don’t fall under the same qualification criteria as Freddie Mac and Fannie Mae loan or any other government agency. The mortgage lender underwrites the loan, leaving it more flexible than the rigid application criteria at a bank.
How to qualify
Qualifying for a DSCR loan uses the cash flow generated by the property itself. With MBANC, the maximum loan-to-value on a purchase is75% so you only need to cover the first 25% of the home’s value up front. It’s also available for cash-out refinancing transactions with a maximum LTV of 70%.
Since a DSCR loan program isn’t based on personal income or typical mortgage debt service ratio calculations, there may be slightly tighter qualifications than if you’re buying a primary residence. Buyers will need to demonstrate a history of ownership and management for rental properties of at least one year, and a minimum credit score of 680 is necessary.
What happens if you don’t have a renter to generate income? You’ll need at least six months of cash reserves on hand to show you can cover months when there’s no tenant in place.
The DSCR calculation
How much can you borrow for a DSCR loan? That depends on the DSCR calculation. It’s based on the monthly portion of the property’s annual net operating income (NOI) divided by the mortgage payment. DSCR calculations fall into three ranges – over 1.15, 1.10 to 1.14, and negative debt service. It sounds complicated but it works like this:
- The tenant pays $5,000 per month to you, the investor.
- Property taxes and other expenses might be around $500 per month, leaving an NOI of $4,500 monthly.
- The net operating income is divided by the debt service ratio to come up with the maximum mortgage payment.
- Thus, the DSCR calculation for an NOI of $4,500 and a DSR of, say 1.4 is…
- 4,500 ÷ 1.4 = $3,214 per month.
In this way, the mortgage payment covers all the expenses plus still contributes to equity and generates some revenue for you.
Choose MBANC for your DSCR mortgage
Are you interested in adding to your rental property holdings? Achieve your financial goals by investing in real estate and generating wealth dependably, and a DSCR loan program can help you get there faster. Contact MBANC today to learn our products and services, including rental income DSCR mortgages.