DSCR Loans
What is a DSCR Loan?
A DSCR loan is a type of non-QM (non-qualified mortgage) loan designed for real estate investors, where approval is based on the property’s debt service coverage ratio rather than the borrower’s personal income. It allows real estate investors to qualify based on rental income producing potential instead of traditional income documentation. Instead of being based on an investor’s income, it is primarily based on the “Debt Service Coverage Ratio” or the cash flow of the property itself. A traditional mortgage loan will require income verification, tax returns and a “Debt-to-Income” (DTI) ratio. DSCR Loans require none of these! Perfect for real estate investors ready to scale (no more W2!) or are looking leave behind the hassle, paperwork and headaches of conventional financing, DSCR Loans are quickly becoming the go-to loan option for real estate investors.
DSCR Loans are for investors with real estate rental properties and are perfect for investors in many situations. Anyone from a first-time real estate investor to a seasoned pro looking to scale a portfolio can use DSCR Loans. The beauty of DSCR Loans is that they are a flexible solution for investors with an easy qualification. This is in contrast to conventional financing which has to follow the rigid and strict rules handed down by the agencies such as Fannie Mae and Freddie Mac.
DSCR Loans are generally a great loan option for Self-employed or Freelance people looking to invest in:
- Rental real estate properties.
- Short term rental properties listed on AirBnB or VRBO.
Its extremely difficult to qualify for conventional financing for investment properties when you don’t have a W2. Traditional lenders will like to see two years worth of steady employment and income for investors. Additionally, they will then use this information to calculate a “DTI” ratio that adds another hurdle. DSCR Loans present a perfect alternative as they do not utilize W2 income, income, or DTI in the qualification process. Qualification is based on the income potential of the property, not the personal income of the borrower.
- People who invest in real estate with partners or a team.
When it comes to investing in real estate, partnering often makes a lot of sense. Its often true that “teamwork makes the dream work” when dreaming of financial freedom. Many investors have found success partnering with other investors that have complementary skill sets. Some examples include investors with capital ($$$ for down payments) but not time teaming up with people willing to do the hard work of finding deals and managing the properties. Maybe one investor is a “numbers guy” while the other is an expert at negotiating deals! Or someone wants to invest out of state in a more affordable market, but wants a partner with boots on the ground in the local market. DSCR Loans are ideal for partnerships because unlike conventional financing, borrowers can borrow in a partnership or LLC (limited liability company) and share ownership!
While real estate investors are using the loan product for newer, more profitable strategies, they typically use DSCR Loans for straightforward rental properties such as SFR investments (single family rentals) on long-term (12-month) leases. Conventional lenders such as banks are slow-moving to adapt to changes, and continue to typically frown on newer strategies. In contrast, DSCR Lenders, especially forward-thinking and innovative ones like Marquis Mortgage, are flexible and friendly to investors specializing in these newer niches. Investors looking to max out cash flow and qualify creatively when investing in short term rentals or the BRRRR Method find DSCR Loans to be the perfect product.
You can qualify for a DSCR mortgage loan without having to use your tax returns or personal income information. This can help you avoid high interest rates and lengthy mortgage loan approval processes. You also won’t be subject to strict lending criteria, as your loan will be determined by your property’s cash flow rather than your income. However, you will have to meet other specific loan requirements:
- Credit Score – Most lenders require a credit score of at least 620.
- Minimum Loan Amount – Most lenders have a minimum loan amount of $100,000
- Property Appraisal – The property will need to undergo an appraisal to determine its current market value and potential rental income.
- Property Type – The loan can only be used for investment properties that generate rental income. The property must be a non-owner occupied, income-producing investment property that is only used for business purposes. It cannot be used for primary residences.
