DSCR
Credit Requirements

A DSCR mortgage loan (Debt Service Coverage Ratio loan) is a type of loan primarily used for investment properties. Unlike traditional mortgages, DSCR loans focus on the cash flow generated by the property rather than the borrower’s personal income or employment history. The loan approval is based on the property’s ability to generate enough income to cover the loan payments, measured by the Debt Service Coverage Ratio (DSCR).

While personal income is not the key factor, credit requirements still play an essential role in qualifying for a DSCR mortgage. Here’s what you need to know about credit requirements for this type of loan:

Key Credit Requirements for DSCR Mortgage Loans

Credit Score
– Minimum Credit Score: Lenders typically require a minimum credit score of 620 to qualify for a DSCR loan. However, a higher score is preferred for better terms.
– Good Credit (700+): Borrowers with a credit score of 700 or higher can expect more favorable loan terms, including lower interest rates and smaller down payment requirements.
– Lower Credit Scores (Below 620): Some lenders may still approve borrowers with lower credit scores, but they may impose stricter terms, such as requiring a larger down payment, charging higher interest rates, or requiring additional reserves.

Credit History
– Clean Credit Report: Lenders prefer borrowers with a clean credit report, meaning no recent foreclosures, bankruptcies, or significant delinquencies. While DSCR loans are less focused on income, lenders still assess the borrower’s creditworthiness to gauge their overall financial reliability.
– Derogatory Marks: Recent major credit events, such as a foreclosure or bankruptcy, will generally disqualify a borrower from obtaining a DSCR loan. Some lenders may allow exceptions after a waiting period (e.g., 2-4 years after the event).

Debt Service Coverage Ratio (DSCR)
While not a credit factor, it’s essential to understand that the property’s DSCR is the main criterion for approval. The DSCR compares the property’s net operating income (NOI) to the debt service (loan payments). For example:
– DSCR = 1.0: The property’s income just covers the loan payments.
– DSCR > 1.0: The property generates more income than needed to cover the loan payments, which is ideal for approval.
– DSCR < 1.0: The property’s income is insufficient to cover the loan payments, making approval difficult unless the borrower provides compensating factors like a higher down payment or additional reserves.
– Lenders typically require a minimum DSCR of 1.25 or higher.

Improving Credit for a DSCR Loan

If you’re looking to qualify for a DSCR loan but have a low credit score or credit issues, here are some steps you can take to improve your chances:
– Pay Down Debts: Reducing your outstanding debts can help improve your credit score, making you a more attractive borrower to DSCR lenders.
– Correct Credit Report Errors: Check your credit report for any errors or inaccuracies, and dispute any incorrect items that could be dragging down your score.
– Establish a Strong Credit History: Regular, on-time payments and reducing credit card balances can help build a positive credit history over time.
– Build Cash Reserves: Having significant cash reserves (savings) can offset a lower credit score, improving your overall financial profile.

While the focus of a DSCR mortgage loan is on the income generated by the property, your credit score and history still play a crucial role in determining your eligibility and the terms of the loan. A strong credit score (700 or above) will typically give you access to better interest rates, lower down payment requirements, and more favorable terms. However, even with a lower credit score, you may still qualify for a DSCR loan if you can provide compensating factors like a higher down payment, strong cash reserves, and a property with a solid DSCR.