Investment Properties
|DSCR Loans: a Tool for Real Estate Investors
Interested in building your real estate portfolio, but hesitant due to strict financing requirements? There is a solution where qualifying is focused on the cash flow of the property rather than personal income. With Debt Service Coverage Ratio (DSCR) loans, you can ditch the lengthy approval process and pursue a more flexible solution.
What are DSCR Loans?
A DSCR Loan is a mortgage for investment properties that uses a measure of the property’s ability to cover its debt payments with its own income as the qualifying income. The measure uses the ratio below.
DSCR = Net Operating Income (NOI) / Total Debt Service
So for example, say you have a property that has a net operating income of $3,000 and your monthly mortgage payment is $2,000, this would come out to a ratio of 1.50. A ratio of 1.00 would mean the property generates just enough cash flow to cover debt obligation.
How DSCR Loans differ from traditional Loans
| Feature | DSCR Loans | Conventional Loans |
|---|---|---|
| Approval Basis | Property’s income (DSCR) | Borrower’s personal income and credit score |
| Loan Terms | More flexible terms | Often standardized with stricter guidelines |
| Documentation | Income verification for the property | Extensive personal financial documentation |
| Best For | Cash-flowing properties and experienced investors | Homebuyers and individuals with stable incomes |
| Debt Ratios | DSCR ratio | Personal debt-to-income (DTI) ratio |
Interest Rate Pricing for DSCR Loans
DSCR Loans typically have the highest pricing advantages with a lower loan-to-value (LTV) ratio and higher DSCR ratio. Mortgage investors see 1.25 and higher as favorable ratios and incentivize these the most with better interest rates. Ratios of 1.00-1.25 will see less favorable pricing due to the risk level. Interest rates can be slightly above standard investment program rates, but the ease of qualification and flexibility may be worth the difference.
Learn More
United Home Loans has multiple DSCR outlets and the best mortgage bankers in the business. If you’re interested in expanding your portfolio, reach out today and we can help you kick start the process.
