DSCR – Debt Service Coverage Ratio Loans

DSCR Loans

A DSCR loan is a mortgage loan secured by a residential income-producing property used for a business purpose.

It is primarily based on the “Debt Service Coverage Ratio” or the “Cash Flow” of the property rather than the borrower’s income.
DSCR measures a firm’s available cash flow to pay current debt obligations.

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A traditional mortgage loan will require income verification, tax returns and a “Debt-to-Income” (DTI) ratio. DSCR Loans do not require income verification from the borrower (Investor).
“Business Purpose” = DSCR loans strictly do not allow the owner of the property to live in the property. It must be used for “Business” or Investment purposes.
DSCR loan financing cannot be utilized to purchase primary or secondary residential homes

Key Takeaways

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 The debt-service coverage ratio loan (DSCR) is a measure of the cash flow available to pay current debt obligations.

 DSCR measures a business’s cash flow versus its debt obligations.

 Lenders use DSCR to determine whether a business has enough net operating income to pay back the loan debt.

 Formula: DSCR equals net operating income divided by debt service, including principal and interest. (Rental income from the property / PITIA – Principal, Interest, Taxes, Insurance and HOA if application payment)
 A DSCR of 1% indicates the property can generate exactly enough operating income to pay off its debt service costs. Therefore, the higher the % the better.
 A DSCR less than 1% reflects a negative cash flow, and the property and/or owner may be unable to cover or pay current debt obligations without depending on outside sources.

Requirements

What is Required to Obtain A DSCR Loan?

Max Loan-to-Value (LTV) Ratio

85% LTV max; First time Investors max may be as low as 70% requiring the Investor to pay a down payment equal to 30%. All depending on Lender guidelines, credit score, loan transaction type (Purchase or Refinance)

Multi-Unit Properties

1-4 Family homes (SFR); 2-4 Unit properties (Multi-family)

Condos and townhomes are permitted

Loan Limits

Minimum Loan Amount: $100k

Maximum Loan Amount: Up to $3M – depending on the Lender

Minimum FICO Score required: 620

Some Lenders may require a 680+ minimum Fico score for 1st time Investors.

Assets

Most recent bank statement covering 30 days history sourced and seasoned funds available

Max Seller Concessions: 2%

Income

No Income documentation or verification is required.

Gift Funds

Gift funds allowed with 5% of borrowers own funds or 100% gift funds allowed there will be a LTV 10% reduction