DSCR: Loans For All Your Investment Property Needs
- May 15, 2024
- 4 min read
Updated: Aug 15, 2024
Are you interested in acquiring a Debt Service Coverage Ratio (DSCR) loan for your investment property? Here’s how you can leverage the property’s cash flow to qualify for acquisitions and refinances without resorting to hard money loans. Unlike traditional mortgage loans, which require tax returns, DSCR loans for investment properties do not. Experience the benefits of DSCR loans with The Trye Group expertise guiding you every step of the way!
Understanding The Basics Of DSCR Loans
A. What is a Debt Service Coverage Ratio Investment Property Loan?
A DSCR loan, also known as an investment property loan or rental loan, does not consider the borrower’s personal income. Instead, it focuses on the property’s rental income. The primary requirement is that the rental income covers the property’s monthly expenses. This means that even if you have a less-than-perfect credit score, you still have a chance to secure a loan for your investment property. The loan amount is determined by the property's cash flow and its ability to cover the loan payments.
B. Why Use a Debt Service Coverage Ratio Investment Property Loan?
Investment property lenders do not require income verification, such as employer letters, W-2s, or pay stubs. The qualifying income is simply the property’s cash flow. Traditional mortgage lenders require tax returns, W-2s, and paycheck stubs to determine income. This can disadvantage self-employed borrowers and real estate investors, whose tax returns may not accurately reflect their financial situation.
C. What Does a Debt Service Coverage Ratio Investment Property Loan Look Like?
Factors Of The Loan: The DSCR is a comparison of the property’s monthly rental income to its monthly expenses. It determines the maximum loan amount an investment property can support. The higher the DSCR, the larger the mortgage the property qualifies for. The monthly rental income is compared to the property’s expenses, including principal, interest, taxes, insurance, and HOA dues (if any).
Principal & Interest: The loan principal is the total loan amount, plus any financed mortgage costs. Amortizing loans include monthly principal payments. Interest-only loans require monthly interest payments, with a balloon payment for the principal at the end of the term.
Taxes, Insurance, & HOA Dues: Calculate monthly taxes and insurance, and add any HOA dues. These costs, along with principal and interest payments, form the debt component of the DSCR calculation.
A DSCR Example:
A property rents for $2,000/month and has the following expenses:
Principal & Interest — $1,000/mo
Property Taxes — $250/mo
Insurance — $120/mo
HOA Dues — $130/mo
TOTAL PITIA — $1,500/mo
In this example, the DSCR loan can be found by dividing the $2,000 Monthly Rent by $1,500 Monthly expenses (PITIA), equaling 1.33. However, no tax return investment property lenders generally want to see a DSCR above 1.00, and sometimes offer better pricing if the Debt Service Coverage Ratio loan is above 1.25-1.50.
The Difference Between DSCR Loans And Traditional Loans
While traditional mortgage lending requires tax returns, investment property loans do not. These loans allow real estate investors to purchase or refinance properties without the need for employment verification, personal income consideration, or debt-to-income ratio calculations. The qualifying factor is the rental income. If the property generates sufficient cash flow to cover its debt, it will qualify. Tax returns also often fail to accurately represent true cash flow due to traditional loan underwriting processes, which apply various guidelines and overlays. Real estate investors and individuals whose tax returns do not reflect their actual financial situation can benefit from no tax return investment property loans. However, a DSCR loan allows real estate investors to qualify based solely on the cash flow of the property. If the rental property is generating positive cash flow, it qualifies as sufficient income.
What About Personal Credit?
For a no-tax-return investment property loan with The Trye Group, personal income and debts are not considered. However, personal credit does play a role in the loan approval process, although the scrutiny is typically no more stringent than for a hard money loan. Lenders just need to see that a real estate investor can reliably pay their bills. More than one or two late mortgage payments in the past year might require an exception for loan approval, potentially delaying the process.
Pros:
No tax returns required
No employment or income verification needed
Personal or business income is not considered
No debt-to-income (DTI) ratio calculations
Enables real estate investors and self-employed individuals to qualify when they otherwise cannot
Cons:
Larger down payment than traditional loans
Rates are slightly higher than traditional loans (though not by much)
Some lenders require landlord experience
Personal credit still influences the approval process
How To Find The Best Debt Service Coverage
Many rental property loan lenders operate exclusively through brokers. The best brokers invest significant time and effort into finding the optimal rates and terms for their clients. It's in their best interest to secure the lowest rate and most favorable terms to close the deal. If you're a real estate investor looking to purchase or refinance a property, no-tax-return investment property loans are an excellent way to avoid hard money loans. Discover how our program can benefit you by speaking with a loan officer at The Trye Group.
To wrap all of that up, about DSCR Loans;
DSCR loans are an excellent alternative to traditional hard money loans, offering a viable long-term financing solution for real estate investors. They combine the reduced documentation and underwriting requirements of hard money loans with rates and fees more similar to traditional loans. The Trye Group is licensed to operate nationwide, enabling us to assist with all occupancy types across the country. We are excited to provide our prompt and professional services to help you achieve your investment goals. Contact The Trye Group to learn more about how you can qualify for a DSCR loan and expand your real estate portfolio!
