DSCR PURCHASE
Essential Elements

The Debt Service Coverage Ratio (DSCR) loan is a type of real estate investment loan that is often used by investors to finance rental properties without relying on personal income for qualification. Instead of focusing on personal income or employment history, the DSCR loan bases its approval on the cash flow generated by the investment property itself. Here are the essential elements of a DSCR purchase loan:

Debt Service Coverage Ratio (DSCR)
– The key metric in these loans is the DSCR, which compares the property’s net operating income (NOI) to the total debt obligations (principal, interest, taxes, insurance, and sometimes HOA fees).
– DSCR is calculated buy dividing the Net Operating Income by the Total Debt Payments
– A DSCR ≥ 1 means the property’s income covers its debt obligations. Many lenders look for a DSCR of at least 1.0-1.25 to approve the loan.
– A DSCR > 1.0 indicates the property generates more income than the debt service.
– A DSCR < 1.0 suggests the property is not generating enough to cover the loan’s debt.

Loan Qualification Based on Property Income
– Unlike traditional loans that require borrower income verification, DSCR loans use property cash flow to qualify.
– The borrower’s personal income and employment history are not heavily scrutinized.

Property Type
– DSCR loans are typically available for investment properties such as:
– Single-family homes
– Multifamily properties
– Condos
– Townhomes
– Mixed-use properties
– The property must generate rental income that can cover the debt obligations.

Loan Terms
– Loan-to-Value (LTV): Lenders typically allow an LTV of 70%-80%, meaning investors need a down payment of 20%-30%.
– Interest Rates: Interest rates for DSCR loans can be higher than conventional mortgages due to the higher risk, especially if the DSCR is low.
– Loan Size: Minimum loan amounts are often around $100,000.

Property Cash Flow Documentation
– Borrowers will need to provide proof of rental income, such as:
– A lease agreement or market rent analysis for the property.
– Operating statements for properties with an income history.
– Some lenders may require bank statements or additional documents showing the property’s income potential.

No Personal Income Verification
– Personal tax returns or pay stubs are not required. However, lenders may still consider creditworthiness and credit scores (usually 620+).

Reserves
– Many lenders will require borrowers to have a certain amount of reserves to cover several months of mortgage payments (typically 6-12 months of reserves).

Borrower Requirements
– Credit Score: A minimum credit score (typically around 620-680) is usually required.
– Experience: Some lenders prefer or require borrowers to have experience managing rental properties, especially for larger loan amounts.
– Down Payment: Typically ranges between 20%-30%.

Prepayment Penalties
– DSCR loans often come with prepayment penalties, meaning the borrower may be charged a fee if the loan is paid off early (common in the first few years).

Higher Interest Rates and Fees
– Since DSCR loans carry more risk, interest rates and closing costs can be higher than those of traditional loans.

DSCR loans are ideal for real estate investors looking to finance rental properties based on the cash flow generated by the property rather than their personal income. Lenders focus primarily on the DSCR, creditworthiness, and property cash flow rather than employment history or W-2 income.