What is DSCR or Debt Service Coverage Loans?
Do you need DSCR or Debt Service Coverage Loans?
People often ask if real estate investments are still the best way to grow wealth, especially with various other investment options like stocks, bonds, and cryptocurrencies. The short answer is YES.
Real estate investments offer steady income cash flow, especially when you have one or two rental properties under your name. Unfortunately, although this might sound very enticing, getting into the real estate rental business can be pretty challenging, especially if you’re a self-employed individual with no fixed/ steady income or even employer tax returns.
Fortunately, several loan programs are available to help self-employed individuals and real estate investors. One such loan program is a Debt Service Coverage loan. This loan program provides real estate investors with the necessary capital to secure their dream rental properties without going through the stress of conventional loans.
What is a DSCR Loan?
When lenders provide investment capital to borrowers, they often need certain assurances or metrics to convince them that the borrower in question can pay off the loan. For family members borrowing from other family members or relatives, word of mouth is often enough to convince them.
Sadly, this is not enough for commercial lenders, irrespective of how trustworthy the borrower may be. DSCR, short for debt service coverage ratio, is a metric that commercial lenders use to assess the ability of a borrower to pay off a loan on a real estate rental property without verifying the borrower’s income.
This metric is obtained by dividing net operating income by the total debt service of the property.
Your net operating income = Total revenue from the rental property – operating expenses.
Total debt service = Debt obligation on the property, including principal and interest.
DSCR = Net operating income / Total debt service
Requirements to Qualify for a DSCR Loan Program
Unlike traditional bank loans, the requirements for a Debt Service Coverage loan program are pretty flexible. Rather than demanding tax returns, proof of income, or other documents that commercial banks require, most DSCR lenders ask the borrower to provide a minimum of the following documents.
- DSCR for the rental property
- Credit score from 620 upwards
- 20 to 25% down payment of the purchase price.
Nonetheless, it is essential to know that this requirement might vary across lenders, as different lenders might require one or more additional documents before processing the loan request.
How Does DSCR Affect My Ability to Qualify for a DSCR Loan?
To qualify for a DSCR loan, borrowers must have a good DSCR score. DSCR scores can be less than, equal to, or greater than 1. A good DSCR score is a score that is above 1, preferably equal to or greater than 1.25, though various lenders may require higher scores.
When evaluating loan eligibility for DSCR loans, lenders prefer individuals with higher scores of 1.5 or more as this gives the lender greater reassurance that the loan can be paid back comfortably.
Consequently, individuals with high DSCR scores enjoy lower interest rates than high-interest rates on scores of 1.25 or below. While scores equal to or less than one may not qualify for a loan with some lenders.
That is not to say that DSCR scores are the only factor lenders look at when determining interest rates. While the DSCR score might evaluate the borrower’s eligibility, factors like the amount of equity available, credit score, and coverage length of the loan might also play a significant part in determining the interest rates and the total amount of interest paid throughout the loan period.
Benefits of DCSR Loans
DSCR loans boast various benefits above traditional loans from commercial banks. Some of them include:
No tax returns hassles: Traditional lenders often require the borrower to provide proof of income, tax returns, bank statements, and other documents before they deem them eligible for a loan.
Unfortunately, most self-employed investors might not be able to provide these documents. Therefore, they turn to DSCR loans as a better alternative to provide them with the capital they need to secure their real estate investments.
No lengthy approval process: Even after providing these numerous and tedious documents, most traditional lenders still have to run various background checks and approvals before they finally approve a loan for an investor.
Time is Money
Sadly, time is money, and the real estate market waits for no one. DSCR lenders, on the other hand, provide loan approvals in as little as 24 hrs, giving investors the competitive advantage they need to thrive in the real estate market.
Higher loan limit: It’s no secret that most lenders have a somewhat limited cap on the amount of capital they provide to investors. They determine this cap by examining the borrower’s credit score and proof of income, which might not accurately represent their ability to repay the loan.
However, DSCR loans use the DSCR metric of the rental property and can provide loans of up to $5 million to real estate investors.
Lower down payment: Most traditional mortgage lenders require at least 20% equity on the investment before they provide investment capital to individuals. Unfortunately, most borrowers might not have that money and may be deemed ineligible for the loan.
DSCR loans have a lower down payment requirement that can be as low as 3%, depending on the lender. This makes it easier for investors to get the lifeline they need to grow their income.
Who Should Apply for a DSCR Loan?
DSCR loans are suitable for real estate investors and self-employed individuals without a steady income or employer’s tax return document. These individuals mostly fall under the following categories.
- Doctors
- Real Estate Investors
- Business Owners
- Self Employed Individuals
- Lawyers
- Freelancers
- Consultants
Nevertheless, other individuals with steady incomes who want to avoid the hassles of traditional loans can apply for a DSCR loan as long as they have the minimum requirement stipulated by the lender.
Get a DSCR Loan Today!
As we’ve explained, getting a DSCR loan is much easier and more convenient than traditional loans. Therefore, it is most beneficial for self-employed individuals that want quick access to investment capital without having to provide income documentation.
So why settle for the tedious loans of traditional lenders when you can work with the best DSCR loan lender in the country. Check out our DSCR loan program and see why real estate investors turn to us for investment capital.