DSCR ( Debt Service Coverage Ratio ) - Investor Loan

[Vinnie Da silva]

As an investor and lender, I see that a lot of people are not familiar with DSCR loan. Its a great program, specially self-employed people, which often find it difficult to get qualified for a mortgage. So I decided to make a short post about this program. Please feel free to add any extra information or tips you might have.

DSCR loans were designed for real estate investor in mind, which often buys in LLCs. Often self-employed people have a hard time getting conventional finance due to tax returns being difficult to decipher — this product does not require a tax return review. For income verification, DSCR loan underwriting focuses on the rental income (in-place or potential) that the property can produce. After allocations for property taxes and insurance, the underwriter calculates a Debt Service Coverage Ratio for the property, which is a key factor in the product's pricing. To determine value and rent, DSCR lenders require a full interior 1004 form appraisal, as well as Single-Family Comparable Rent Schedule. The loan product is generally full recourse to the members of the LLC that own the property, and of course their FICO is also a key factor in the product's pricing. Your score can be as low as 620, but you will be paying a higher prince and rate so keep that in mind.

The minimum DSCR ratio can go as low as 0.75x

So here is the Formula for you to see if it works for you:

DSCR = NOI / by Annual Debt Payments (AKA "Debt Service" or just "Debt Payments")

Net Operation Income (NOI) = Annual net income + depreciation + interest expenses + amortization and other non-cash items

Debt Service:

Add up one year’s worth of principal repayment + interest payments + lease payments

[Madeline Malinovsky]

I'd add that you can find lenders that do not require a debt-service ratio (ie: they will go under .75), however they often require a higher down payment and the interest rate will be a bit higher as well. The 0.75 - 1.00 range is pretty good standard. 

Also, the funds to purchase must come from the person(s) on the loan. They cannot be gifted! I've seen this come up all too often.