What Exactly Is a DSCR Loan?
Are you looking to expand your real estate portfolio, but growing too rapidly for conventional loans? Are you sick of the high-interest rates on hard money? Do you want to qualify for a mortgage based on the cash flow generated by your investment property and avoid providing employment information, tax returns, payslips, W2s, etc.?
If you answered yes to any of these questions, a DSCR Mortgage loan is perfect for you. A DSCR loan allows you to qualify based on the cash flow generated by your investment property without providing any income or tax return documents.
Table of Contents
- What is Debt Service Coverage Ratio (DSCR)?
- The Benefits of a DSCR Loan
- How to Qualify for a DSCR Loan
- What are the Borrower Qualifications for a DSCR Loan?
- How To Apply for a DSCR Loan?
- Who is the DSCR Loan Perfect for?
- Why a DSCR Loan is a Great Option for Real Estate Investors?
- DSCR Loans for Foreign Nationals
What Is a DSCR Loan?
DSCR Loans, also known as Debt Service Coverage Ratio Loans, are designed for real estate investors who do not want to use their tax returns to qualify for the purchase of investment properties.
The debt service coverage ratio (DSCR) is a calculation that shows how well a property’s annual net operating income can cover its annual mortgage debt obligation.
Since real estate investors frequently deduct significant costs from their rental properties, a DSCR loan is more appropriate and simpler to qualify for. The DSCR qualification allows an investor to scale limitlessly and removes any cap on the number of properties an investor can own.
What is Debt Service Coverage Ratio (DSCR)?
A measure of a property’s cash flow against its debt obligations is called the Debt Service Coverage Ratio, or DSCR. Basically, DSCR reveals if a real estate property is making enough money to cover its expenses. When a real estate investor applies for a new loan or refinances an existing mortgage, lenders evaluate the debt service coverage ratio as one indicator to calculate the maximum loan amount.
The formula for calculating DSCR for a property is Net Operating Income / Debt Obligations. Net Operating Income (NOI) is generally calculated as the current yearly income, or the estimated market rent for the property in question. An appraiser can calculate the estimated market rent on the property using a standard 1004 form. If the property is being used as a short-term rental, via AirBNB or VRBO, the estimated rental income can be calculated via MBANC’s unique INVEST software.
If you know what the property will generate, simply divide that by the property’s total expenses. For example:
Your property brings in $18,000 a year, and costs you $12,000 to pay for the mortgage, taxes, insurance, and HOA fees. Your DSCR ratio would be calculated as:
$18,000 / $12,000 = 1.5
In this example, your DSCR ratio would be 1.5. A ratio of 1 is ‘breaking even’, and the property is covering its expenses. A ratio below 1 is a ‘negative’ debt service, and the property does not financially support itself.
What if my Chosen Property Does not ‘Debt Service’? Will MBANC Still Finance it?
What if you find a property, and it does not generate a debt service coverage ratio of 1 or higher? If you do your calculation and your property’s ratio is below 1, MBANC can still finance your loan. In these scenarios, MBANC uses compensating factors such as your credit score, reserve assets, even experience, to get your loan approved. In certain cases, you may have a plan for the property that is worth the risk of a negative debt service, and MBANC will work with you to achieve that goal. The downside to a negative debt service is usually a slightly lower LTV, or worse pricing on your mortgage, as the loan becomes higher risk for MBANC.
The Benefits of a DSCR Loan
There are numerous benefits of a DSCR loan, some of them being:
- DSCR loans require the least amount of paperwork of any mortgages. You need to demonstrate that you have the assets for closing costs and reserves, have a workable credit score, and locate a profitable property – that’s it.
- DSCR loans are made to help real estate investors who require immediate access to capital. These loans are the fastest program to close and are perfectly tailored for borrowers who need to close quickly.
- DSCR loans can be used to finance the purchase of a property, as well as refinance an existing investment property loan.
- DSCR loans are not based on your personal income, but rather the monthly rental income of the property you’re purchasing. This is especially beneficial for investors who are self-employed or have complex income structures. No tax returns!
How to Qualify for a DSCR Loan
MBANC’s criteria for the DSCR loan products are listed below. These requirements are simple, easy, and as unintrusive as possible.
Investor Cash Flow Loans can be used to buy or refinance a variety of property types, including vacation rentals and short-term rentals (AirBNBs and VRBOs). Purchases of hotels and apartments, however, are not allowed. These loans are only residential.
You should also prepare to make a down payment of at least 20 percent to get a DSCR loan.
While you can qualify with a score as low as 680, your terms and pricing will be much more favorable with credit scores above 700 and 720.
What are MBANC’s Borrower Qualifications for a DSCR Loan?
The great thing about MBANC’s DSCR mortgage programs is that you don’t need to provide any income documents! MBANC will only look at the subject property, your current assets, and your credit.
- No personal income is used to qualify for DSCR loans
- All income qualification is based on the subject property’s cash-flow
- Gift funds are allowed
- There is a two-year waiting period after bankruptcy, foreclosure, deed instead of foreclosure, short sale
- Down payments and credit are what determine mortgage rates.
- There are no debt-to-income ratio caps. Even negative-DSCR properties (properties with a DSCR ratio under 1) can be financed
- Types of properties eligible are single-family homes, condos, townhouses, and two to four multi-family unit properties.
- No limitations on the number of properties borrowers have in their real estate portfolio
- Seller’s concessions up to 2% are allowed
- Interest-only available
How do You Apply for a DSCR Loan?
You can apply for a DSCR loan by contacting MBANC directly and working with your personal loan officer. The order of the application process is:
Step 1: Application
MBANC will outline every aspect of the loan, including its value, term, fees, and other specifics. You will fill out the 1003 Universal Loan Application, which can be completed over the phone with your loan officer.
Step 2: Appraisal and Processing
For DSCR loans, you must complete the standard loan paperwork. You should be aware that any financial documentation you submit for a DSCR loan will only ask for details about your company or rental property, not your past income or tax returns. An appraisal will be ordered for the subject home, and an appraiser will approximate the value and calculate the estimated rental income for the property.
Step 3: Underwriting and Closing
Once your file is complete and the appraisal is returned, your file will be underwritten in-house by MBANC’s expert underwriters, who are the industry-leaders in dealing with DSCR loans. Your closing will be orchestrated with a title company for the transaction, but this final stage of the loan process is usually the quickest part.
Who is a DSCR Loan Perfect for?
DSCR loans are a good choice for investors who do not want to provide employment information, tax returns, payslips, W2s, etc. It’s ideal for self-employed borrowers with very complex incomes looking for an investment property, as it addresses the problem of having to deal with complex tax returns. It can also be a great option if you own several investment properties and say you have reached the traditional credit limit of ten.
- Investors who don’t wish to provide employment information (tax returns, payslips, W2, etc.)
- Investors who want to close quickly
- Investors with large real estate portfolios
- Investors with income that is too complex for conventional banks
Why a DSCR Mortgage is a Great Option for Real Estate Investors?
DSCR loans allow you to scale your real estate portfolio endlessly. You can close each DSCR loan in an entity, such as an LLC, and your credit can remain clean while you scale. While the properties are qualifying via their own income, you do not need to worry about your income or tax returns not supporting your expanding investments.
DSCR loans are also a good choice if you’re looking to buy an investment property quickly, as the process is generally faster than traditional financing. And since these loans are asset-based, they tend to have more flexible underwriting guidelines than other types of loans.
Investor DSCR Loans for Foreign Nationals
Foreign nationals who want to buy real estate in the US can do so with DSCR mortgages. These loans differ from typical investment property loans in a few important ways.
First, 65-70% is typically the maximum loan-to-value (LTV) ratio. This means that if you want to use a DSCR mortgage to finance a property, you will require a down payment of at least 30%.
Second, compared to standard investment property loans, these loans frequently have higher interest rates and fees.
Finally, qualifying for these loans does not require income documentation from your country of origin or residence. This allows foreign investors to get financed through MBANC with very little documentation, and very simple procedures.
The DSCR loan program is perfect for investors who don’t want to provide employment information or tax returns. It can also be a great option if you own several investment properties and have reached the traditional credit limit.
Rental income is used instead to qualify for the loan, which makes it a great option if you’re self-employed or have a complicated financial situation. No personal income is required to qualify. This saves you from submitting complicated income statements and tax returns.