DSCR Loans
Buying property is not just an opportunity to own a home. You can also purchase investment properties to generate profit from rental agreements. Real estate investors can make solid income from owned properties, but acquiring these properties is just the first step in making money. Most buyers cannot afford the purchase price of an investment property.
Fortunately, there is a financing solution designed for real estate investors who want to purchase rental properties. These products are debt-service coverage ratio (DSCR) loans. A DSCR loan is a type of mortgage reserved for investment properties, making it easier for a real estate investor to build a portfolio.
TrueWay Mortgage is a trusted provider of debt-service coverage ratio loans for buyers interested in income-producing properties.
What is a DSCR Loan?
A debt-service coverage ratio (DSCR) loan is a mortgage product that investors often use to purchase rental properties. For many types of loans, the lender will evaluate the borrower's financial background when assessing risk.
However, a debt-service coverage ratio mortgage loan also takes the income potential of the property into account. For example, suppose a multi-family home is estimated to bring in significant profits. In that case, this can make it easier for the borrower to have their DSCR loan approved, even if their current income is not as substantial.
TrueWay Mortgage has the expertise to guide buyers through this process and help them leverage investor cash flow loans.
How DSCR Loans Work?
Let’s delve a little deeper into how DSCR loans work. The lender is primarily concerned with the positive cash flow the property can generate. Therefore, they will look at the total debt obligations of the property and compare the annual debt payments to the net operating income.
The debt-service coverage ratio is calculated by dividing the net operating income by the annual debt obligations. DSCR lenders typically want to see ratios that are significantly higher than 1 to 1.
For example, an investment property generates $200,000 in net operating income each year. The total debt service for the year is $170,000, so the debt-service coverage ratio is 1.18. Some DSCR loan lenders will be happy with that ratio, demonstrating that the property generates just enough income to cover its annual mortgage debt and other current debt obligations.
Some DSCR loans offer interest only payments for real estate investors, something not available with many conventional mortgages. Many companies who finance DSCR loans provide a fixed rate for thirty years. However, this option lets investors pay only interest payments for the first ten years, freeing up more personal finances to build their real estate portfolio.
If you are interested in DSCR loans, TrueWay Mortgage can guide you through these calculations to determine the property’s cash flow potential.
Benefits of Choosing a DSCR Loan
Investors can choose from several loan types when attempting to finance their purchases, so what makes DSCR loans a better option than other products like conventional mortgages? The primary benefits are the flexible qualification standards, no personal income verification, and the various types of properties that can be purchased. TrueWay Mortgage is dedicated to making DSCR mortgage loan products available to diverse investors.
No Personal Income Verification
In most conventional mortgages, a person applying for a loan to buy property will have their income assessed. The lender will look at W-2s, paychecks, bank statements, tax returns, and other metrics to determine the borrower's risk and ensure they can make monthly mortgage payments. However, the lender may not see sufficient income if you are attempting to purchase an investment property with conventional mortgages.
Rather than profoundly scrutinizing your salary, debt-to-income ratio, and employment like traditional loans to determine a loan amount, DSCR lenders require verification of the property’s gross rental income. This is ideal for real estate investors with complex incomes.
These are sometimes called bank statement loans because many investors use their bank statement to show rent income being deposited into the account, eliminating the need to look at things like debt to income ratio during the loan approval process. TrueWay Mortgage has a streamlined process for the DSCR loan program so borrowers can obtain financing efficiently
Qualifies Based on Property Income
Your ability to qualify for a DSCR loan depends on the property rather than your job or personnel income. As a result, if you are interested in a property already producing solid rental income, it will be easier to secure a loan amount to purchase it.
Even if it is a new rental property that does not yet generate rental income, the lender will base their underwriting on financial projections. As a result, you and the lender should be more concerned with the property’s cash flow than your income.
TrueWay Mortgage has plenty of experience with measuring the cash flow generated by an investment property, so we can evaluate a property’s income accurately.
Suitable for Multiple Property Types
Many loan products are restricted to certain types of properties. For example, FHA loans state the loan amount can only to be used for primary residences. Many commercial loans can only be used to purchase commercial buildings.
A DSCR loan is far more flexible, allowing you to purchase single-family homes, multi-family properties, and even commercial properties, as long as they generate enough rental income to cover their total debt service.
Our team at TrueWay Mortgage takes a tailored approach to each borrower. We will first work to understand your needs before discussing your DSCR loan options.
DSCR Loan Requirements
Although the primary qualifying metric for DSCR loans is the property’s positive cash flow, there are other factors the lender will assess before approving your loan. Typically, your credit score, the down payment, and the DSCR ratio will have the most significant impact on whether your loan will be approved. If you have concerns about these requirements, TrueWay Mortgage will help you create a strategy to meet them.
Down Payment Requirements
Down payment requirements are typically higher for rental properties than primary residences. While you can acquire a home with a down payment as low as 3.5%, the minimum down payment for a DSCR loan is 15-20% for a single-family home.
If you are purchasing a multi-family property, the lender may require 20% or more. Generally, the more expensive the property is, the more money you need to pay upfront. TrueWay Mortgage offers competitive terms on DSCR loans that allow investors to make affordable purchases on investment properties.
DSCR Ratio Expectations
The DSCR ratio is calculated by dividing the net operating income of a property by its annual debt total. The resulting ratio demonstrates how profitable the property is based on rental income. If it makes enough net operating income to reach a ratio above 1.25, this will generally be high enough for most lenders to approve your loan. A ratio of 2 would be considered very strong for investment properties. On the other hand, a ratio below 1 would represent negative cash flow, which is too risky for the lender.
TrueWay Mortgage will assist you with the property assessment to meet this standard and qualify for a DSCR loan based on cash flow.
Minimum Credit Score
Most DSCR loans have a high loan amount. Even if the property being purchased is just a single-family dwelling, the loan could be an amount in the hundreds of thousands. The lender will need to make sure you reliably pay back your debts before taking on this much risk.
Therefore, they will look at your credit score before approving the loan amount. The best DSCR lenders usually require a credit score of at least 660 even to consider a borrower. Some lenders may have higher minimums, like 700 or 720. The required score may also depend on the type of property, the property’s net operating income, and the total loan amount.
TrueWay Mortgage provides personalized support to help clients determine their eligibility for rental loans based on credit scores.
How to Apply for a DSCR Loan?
If you are in the market for a rental property, you must understand the application process for a DSCR mortgage loan. Here are some of the steps you will experience when working with a lending expert like TrueWay Mortgage.
Initial Consultation with TrueWay Mortgage
First, our team wants to understand your financial goals for a rental property. We will have an initial consultation to discuss your DSCR loan options and the type of property you want to buy. With TrueWay Mortgage’s one-on-one support, navigating these early stages will be simple.
Pre-Qualification Process
Pre-qualification for DSCR loans is primarily based on evaluating the property’s gross income and debts. We will also examine the DSCR ratio to determine whether the property is profitable enough to warrant loan approval. At TrueWay Mortgage, our pre-qualification process is streamlined so you can quickly figure out a budget.
Documentation Requirements
While you do not have to provide much personal financial information during the application process, numerous documents will still impact your loan approval. Property income, expense reports, cash flow statements, operating expenses, rental history documents, income taxes, vacancy reports, and other information will be needed to give the lender an accurate picture of the property’s potential for profit.
Lenders will also consider how much debt you have. The debt service coverage ratio loan requirements ensure you can make a mortgage payment and help determine your DSCR loan rates. You may need to show verification of the debt you have and any costs associated with it, such as lender fees, so that lenders can measure cash flow.
If you need assistance gathering these documents, our mortgage team can help. Our experts can tell you everything you need for a debt service cover ratio, to prove a company’s cash flow, and let you know whether we need your tax returns to prove you can make mortgage payments.
Types of DSCR Loans Available
Although most DSCR loans operate similarly, they can come in different shapes and sizes. The type of DSCR loan you apply for should depend on your individual needs and the type of property you purchase. TrueWay Mortgage will help you tailor a loan product to suit your financial goals.
DSCR Loan for Single-Family Properties
Many real estate investors start with smaller properties. Single-family homes are some of the most popular options for investment properties because they are more affordable and flexible.
They can be used as vacation rentals with short-term guests or as long-term housing for annual tenants. Condos and townhomes can also fall under this category.
TrueWay Mortgage has plenty of experience working with investors who purchased single-family dwellings, so we can help you find the right DSCR loan product for this need.
DSCR Loan for Multi-Family Properties
If you are ready for a more significant step up, multi-family properties may be the right investment choice. This can cover duplexes, apartment complexes, or even four-family homes.
These more significant investments will require higher down payments and a higher credit score since their debt obligations are likely greater. If you need support for a more considerable investment in a multi-family property, TrueWay Mortgage can help you with a personalized approach.
DSCR Loan for Commercial Properties
A DSCR mortgage can also be used to purchase a commercial property. A commercial building depends on business tenants instead of relying on residential tenants who pay rent to live in the building. You must sign lease agreements with companies that rent to occupy offices or storefronts on commercial property.
These purchases can be more complex than residential properties, but TrueWay Mortgage has experience financing various property types.
Comparing DSCR Loans to Other Loan Options
All lenders care about is whether you can afford your monthly loan payments and avoid defaulting on the mortgage. Every metric used to assess your risk is aimed toward figuring out if you can afford to pay back the loan and interest.
DSCR loans offer an advantage to investors that many other loan types cannot. TrueWay Mortgage will consult with you to decide on the best loan option for your investment.
DSCR Loans vs. Conventional Loans
Conventional loans are the most popular mortgage products used to purchase properties across the United States. They offer some benefits for investors, but lenders will dive deep into your finances for a conventional loan.
This will involve requirements for credit scores, debt-to-income ratios, and stable income. A DSCR loan primarily evaluates your credit score, the property's net income, and the down payment size for approval.
DSCR Loans vs. Hard Money Loans
Another financing option for real estate is a hard money loan. These short-term loans with high interest rates can be more costly than DSCR loans. They are often used as a last resort when borrowers need a lot of money quickly.
A hard money loan uses the property's value as collateral for approval, whereas the DSCR mortgage depends on the property's income potential. TrueWay Mortgage’s competitive offerings make investment property loans simple.
DSCR Loan Limits and Interest Rates
Depending on your lender, there may be a limit to how much you can borrow for your investment. These loan limits vary, but most lenders will not lend more than $3.5 million for a property, even if it generates plenty of income. Most lenders also won’t give out financing for loans less than $100,000. The interest rate on your loan will determine your monthly payments and overall loan cost, so seeking lenders with competitive rates is key to saving money.
TrueWay Mortgage will provide guidance in finding the best interest rates for your needs.
Why Choose TrueWay Mortgage for DSCR Loans?
TrueWay Mortgage can be your trusted partner for DSCR financing. Our team has vast experience with these investment loans and can guide investors toward the right products for their needs. If you want to expand your portfolio, our team will ensure you can do so affordably.
Contact Sam and Anisha Mauldin
TrueWay Mortgage
Start Your DSCR Loan Journey Today
An initial consultation is key to understanding your financial goals for an investment property. TrueWay Mortgage will support you every step of the way as you apply for a DSCR mortgage loan. We can also help you with a refinance loan, with cash out refinances, and more. We’ll always make sure there aren’t DSCR loan surprises.
Call us today at 404-962-0032 to learn more about DSCR loans and how they can build your investment portfolio.