Are you looking to become a real estate investor but need help finding the funds to get started? DSCR loans could be the perfect solution for expanding your portfolio without dealing with all the usual hassles. A report by S&P Global shows that DSCR loans made up 50% of non-QM transactions in 2022, up from 22% in 2019, highlighting their growing interest from investors.
What makes DSCR loans stand out is their simplicity. Instead of qualifying based on your personal income or tax returns, lenders care about the property's ability to generate revenue. For many real estate investors, this creates an opportunity to expand faster, with fewer restrictions holding you back.
In this article, we'll explore why DSCR loans are gaining momentum and how they can help you unlock a financing option that works for real estate investors.
What Are DSCR Loans?
The Debt Service Coverage Ratio (DSCR) is a financial metric that helps lenders assess if a property's income can cover its loan payments. To calculate it, you divide the property's net operating income (what's left after expenses) by its debt payments. A DSCR of 1.0 means the property makes just enough to pay the loan, while anything above 1.0 signals more income than needed.
What sets DSCR loans apart is that they're approved based on the property's income instead of your personal finances. If you're self-employed or have inconsistent income, you can still qualify because the lender is primarily concerned with the property's projected revenue. This allows you to obtain a mortgage without needing traditional documents like W-2s or tax returns.
DSCR loans offer many options for different investment strategies, including 30-40-year fixed, ARM, and interest only. For example, if you're interested in long-term cash flow, you might opt for a 30-year fixed-rate loan to lock in predictable payments. If you prefer to maximize short-term cash flow, an interest-only loan could be the best fit because it allows you to make lower payments upfront. These flexible terms allow you to customize your loan based on your plan to grow your investment over time.
DSCR Example
Imagine you're buying a rental property that generates $50,000 in annual net operating income (after expenses). Your yearly mortgage payments total $40,000. To calculate the DSCR, you divide the income by the debt payments:
DSCR = $50,000 ÷ $40,000 = 1.25
This means the property earns 25% more than what's needed to cover the debt. Since the DSCR is above 1.0, the lender sees the property as a lower-risk investment because it's generating enough income to cover the loan.
How to Qualify for a DSCR Loan
To qualify for a DSCR loan, lenders typically require:
- Loan-to-Value (LTV): 75-85%, meaning you can finance up to 85% of the property's value.
- Credit Score: Minimum of 620.
- Loan Amount: Ranges from $100K to $4M.
- Property Types: Eligible properties include SFRs, PUDs, condos (including non-warrantable and condo hotels), 2-4 units, and short-term rentals.
- DSCR Ratio: Minimum 0.75 DSCR (the property generates at least 75% of the income needed to cover the loan payments.)
Partner with MARQ Mortgage
At MARQ Mortgage, our priority is helping you succeed. By working with a wide range of DSCR lenders, we make it easy for you to compare loan options that match your specific investment needs. Whether you're aiming for higher loan-to-value ratios or flexible repayment terms, we bring the best offers directly to you, ensuring you get the most value.
Our team makes the process easy so you can focus on growing your real estate portfolio. Are you ready to get started? Contact us and discover how we can help you grow your portfolio with the right DSCR loan.
