The Debt Service Coverage (DSCR Loan) can be used to purchase, refinance or for a cash out refinance of investment and commercial properties. DSCR is the ratio of cash available from the income of a property for borrowers/investors to cover principal, interest, and lease payments of their investment. DSCR is used as a benchmark by traditional lenders of real estate. It measures the ability of an entity (corporation or individual) to produce enough funds to cover the loan payments on the loan in order to easily be able to pay the monthly mortgage.
How Does a DSCR Loan Work?
Because real estate investors write off expenses on their properties, some may not qualify for a conventional loan. The debt service coverage ratio loan allows these individuals to qualify more easily because they don’t require proof of income via tax returns or pay stubs that investors either don’t have or that don’t represent their true income due to write-offs and business deductions.
- Benefits of DSCR Loans for real estate investors include:
- Potentially quicker closing times
- No income or job history verification required
- No limit on the number of properties
- Loan amounts up to $5,000,000
- Unlimited cash out
- As little as 20% on down payments
- Credit scores as low as 620
- Cashout Refinance up to 75% LTV
- Debt Service Coverage Ratios as low as .75%
- Interest-only loan option available
- Suited for new and seasoned real estate investors
- Both long-term and short-term rentals are eligible (Airbnb, VRBO, etc.)
- No reserves required on cashout loans, 6 months required on all other loans unless the DSCR ratio is less than 1.
- DSCR LLC loans: Close in the name of your LLC
What Is the Debt Service Coverage Ratio (DSCR)?
The (DSCR) Debt Service Coverage Ratio is the ratio of a property’s annual gross rental income and its annual mortgage debt, including principal, interest, taxes, insurance,(PITI) and HOA (if applicable). Lenders use DSCR to analyze how much of a loan can be supported by the income coming from the property as well as to determine how much income coverage there will be at a specific loan amount. Lenders do not take into account expenses such as management, maintenance, utilities, vacancy rate, or repairs in the debt service coverage ratio
What Is a Good DSCR Ratio?
Many lenders may require a 1.25 DSCR to qualify for a DSCR mortgage loan. However, CambridgeHomeLoan Funding allows real estate investors to qualify for a loan with a DSCR as low as .75 and even no DSCR. so that they can qualify with the cash flow of your property. Please note that interest rates are better on DSCR ratios of 1 or above and that a DSCR ratio of less than 1 requires some months of reserves and will typically come with a higher rate. Real estate investors can increase the DSCR for the purpose of borrowing by choosing an interest-only loan to maximize cashflow.
When considering what a good DSCR ratio is, lenders need to ensure that a borrower is able to pay back the loan.
How to calculate DSCR. DSCR Formula Calculation
The debt service coverage ratio formula is the annual gross rental income divided by the debt obligations of the property.
Annual Gross Rental Income/Debt Obligations =
Debt Service Coverage Ratio
To find your Gross Rental Income we take your annual rental income based on your lease agreement and the appraiser’s comparable rent schedule and use the lesser of the two. When you receive an appraisal report it will need to include a market rent schedule 1007. This will give your dscr lender the market rent to include. If you are getting higher than market rent, you may be able to use that by proving a 12 month history of LTR or STR rental income. This way you can qualify off of that rather than the appraiser’s market rent.
The Next step is to find your annual debt. Your annual debt for loan qualification purposes is equal to the total annual principal, interest, taxes, insurance and HOA (if applicable) payments. Annual Debt = Total Annual PITI payments
Next, you will divide the annual gross rental income by your annual debt for your ratio. DSCR = Annual gross rental income/Annual Debt
Please note..Net Operating Income (NOI), Capitalization Rate (Cap Rate), Cash on cash return (COCR), and Return on Investment (ROI) are not considered for DSCR mortgage loan qualifying purposes.