DSCR or QM loan?

[Michael Addison]

Hello,

First time buyer searching in Cleveland. My agent has presented a turnkey duplex to me that looks good. Right now I am looking for a lender and have spoken with 2. One recommends a DSCR loan and the other offers a QM loan. Which one is better for a 1st time investor? Or does it matter? Thanks

[Chris Seveney]

Quote from @Michael Addison:

Hello,

First time buyer searching in Cleveland. My agent has presented a turnkey duplex to me that looks good. Right now I am looking for a lender and have spoken with 2. One recommends a DSCR loan and the other offers a QM loan. Which one is better for a 1st time investor? Or does it matter? Thanks

Both DSCR (Debt Service Coverage Ratio) loans and QM (Qualified Mortgage) loans serve different purposes and have unique advantages, particularly for a first-time investor like yourself looking at a turnkey duplex in Cleveland.

A DSCR loan focuses primarily on the income generated by the property rather than your personal income. This type of loan typically requires a minimum DSCR of 1.25, which means the property generates enough income to cover 125% of the debt service payments. This can be beneficial for investors since it allows you to qualify based on the property's cash flow rather than your personal financial situation. It can be a smart choice if you're aiming for a property that you plan to rent out.

On the other hand, a QM loan is designed to meet certain underwriting standards that protect borrowers. QM loans generally have more stringent requirements such as limits on fees and points and a maximum loan-to-value ratio. They typically offer lower interest rates compared to DSCR loans because they are seen as lower risk. This could be advantageous if you’re looking to keep your monthly payments manageable and benefit from stable long-term financing.

As a first-time investor, consider the following factors to decide which loan is better for you:

Evaluate your investment strategy— are you primarily relying on rental income to cover mortgage payments?

Determine your comfort level with the potential risks associated with cash flow fluctuations, especially if you choose a DSCR loan.

Consider your personal credit situation and whether qualifying for a QM loan is straightforward due to your financial profile.

Think about how long you plan on holding the property. A DSCR might be more suitable for short-term investment strategies, while a QM loan may align better with long-term objectives.

Hope this helps