DSCR Mortgage Loans: Debt Service Cover Ratio

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will be covering and discussing DSCR mortgage loans on rental and investment properties. DSCR mortgage loans stand for debt service cover ratio. Gustan Cho Associates is a mortgage broker licensed in multiple states with a national reputation for being able to do mortgages other lenders cannot. Gustan Cho Associates is a mortgage company with no lender overlays on government and conventional loans with over 170 wholesale mortgage lending partners in alternative financing loan programs, non-QM loans, commercial loans, and specialty mortgage products.

Can Real Estate Be A Good Investment?
Is Real Estate A Good Investment?

Debt Service Coverage Ratio Mortgage Lenders With Multiple DSCR Mortgage Options
Debt Service Coverage Ratio Mortgage Lenders

Gustan Cho Associates reopened non-QM loans and dozens of other alternative financing mortgage programs this past June 2020. More and more people are getting into real estate investment property investments. Non-QM and alternative loan programs geared towards real estate investors are becoming more and more popular. GCA Mortgage Group has a national reputation for being a one-stop mortgage shop. This is because not only do we offer no lender overlays on FHA, VA, USDA, and Conventional loans, but there is no mortgage non-QM and/or alternative loan program that we do not offer.

Are DSCR Mortgage Loans Good?

A frequently asked question by real estate investors is are debt service coverage ratio mortgage loans good and worthwhile for beginner real estate investors? In general, DSCR mortgage loans are the investor loan of choice for all types of real estate investors, from beginner real estate investors to experienced veteran investors. DSCR mortgage loans are the best loan program for real estate investors of rental properties because qualified income is based on the income of the property and not the personal income of the borrower.

Debt Service Coverage Ratio Mortgage Process

The mortgage process of debt service coverage ratio mortgages is streamlined, fast, and smooth compared to full doc mortgages. Down payment requirements on debt service coverage ratio mortgages is normally lower than traditional real estate mortgage loans. Some of our top non-QM mortgage programs offered at Gustan Cho Associates are debt coverage service ratio mortgages, bank statement mortgages, asset-depletion loans, non-QM loans one day out of bankruptcy and/or foreclosure, and dozens of other non-QM mortgage programs for owner-occupant homes, second homes, and investment properties.  Borrowers who are looking to qualify for DSCR mortgage loans, and other unique and/or non-QM mortgages, you have come to the right place.

DSCR Mortgage Loans Versus Other Loan Programs

Not only does Gustan Cho Associates have no lender overlays on government and conventional loans, but we also have non-QM wholesale lending partnerships with dozens of alternative financing mortgage lenders. We have unique non-QM and alternative financing mortgages on owner-occupant, second homes, and investment properties. Some of the newest loan programs we have recently launched are the DSCR Mortgage Loans For Real Estate Investors On Investment Properties. The debt service coverage ratio is an important factor in investment property loans. The debt service coverage ratio is also referred to as DSCR. In the following paragraphs, we will detail what DSCR is and how it impacts financing on investment property loans. In general, the debt service coverage ratio is a formula of the borrower’s ability to repay the debt obligation on an investment property loan based on the borrower’s monthly payment of the P.I.T.I. versus the income the investment property generates.

No-Doc Mortgages 

There are no income tax returns required. The wholesale lender will underwrite the subject property on its own merits. The market rent through an appraisal needs to be 115% of the current monthly payment of the mortgage. So if your monthly P.I.T.I. is $1,000 per month, the market rent needs to be $1,150 per month or higher. The current credit score of the main borrower needs to be at least 660 FICO. However, there are talks about lowering the minimum credit score requirement to a 620 FICO. The real estate investor needs to put a 25% down payment. The borrower needs six months of reserves. This is a very popular mortgage loan program for real estate investors looking for a no-doc limited documentation mortgage loan program on investment properties

DSCR Mortgage Loans Are For Investment Properties

Investment property financing is different than owner-occupant home loans. Mortgage on investment properties is considered riskier investments to lenders. More risk means higher default rates. Higher default rates and higher risk mean the lender will charge loan level pricing adjustments (LLPAs). This includes higher mortgage rates on investment property loans. Higher down payment requirements are required on investment property loans.

What Is The Meaning of Debt Service Coverage Ratio

Calculating The DSCR

In this paragraph, we will go over how to calculate the debt service coverage ratio (DSCR). The DSCR is calculated by taking the subject property’s annual net operating income (NOI) and dividing it by the property’s annual debts.  Let’s take a case scenario: Let’s assume a property generates $1,000,000 in annual net operating income (NOI). The same property has annual debt payments of $800,000. The DSCR on this property is 1.25.

How Mortgage Underwriters Calculate Income on DSCR Loans

What does the 1.25 DSCR mean? The 1.25 DSCR means that the property’s assets can cover its annual debt 1.25 times in a given year. In the event, that the property’s DSCR is under the 1.0% DSCR, the property cannot cover its current debt obligations. The higher the debt service coverage ratio, the stronger the subject property’s cash flow. DSCR in the 1.25 to 1.50 is considered a safe bet and favorable for lenders. What this range in DSCR means is the assets can generate an additional 25% to 50% extra income after all debt payments have been paid. In the following paragraphs, we will cover and discuss DSCR loans which are short for debt service coverage ratio mortgages. The housing market in 2022 is already off to an extremely hot start. The calendar of 2021 was one of the craziest years in the housing market in recent history. Even while bidding wars were happening all across the country, many of our borrowers were able to find their dream homes. Many readers of Gustan Cho Associates are also real estate investors.

Debt Service Coverage Ratio Can Fluctuate Year To Year

The DSCR can vary year to year depending on the cash flow and expenses of the subject investment property. Lenders are open-minded when it comes to having a higher DSCR on investment properties. Many real estate investors can be sitting on investment properties with lower than market rents. There is huge potential for increasing rents after rehabbing the subject property.  The qualification and experience in managing properties are taken into consideration when underwriting DSCR Mortgage Loan Programs.  For more information about the content of this blog and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.

DSCR Loans: No Income Documentation Required

Since the housing market is so hot, buying a second home or an investment property can be quite difficult. In fact, Fannie Mae and Freddie Mac have even added pricing adjustments to curb the purchases of second homes and investment properties. In this blog, we will detail one of the most common loan programs used to purchase investment properties. We will also discuss how to apply for this loan program with our team of mortgage experts.

DSCR Mortgage Loans For Rental Investment Properties

A common loan program called “debt-service coverage ratio” or DSCR loans is a very common loan program used to purchase investment properties. The reason this is so common is there is very little documentation required to use this loan program. In short, the debt service coverage ratio mortgage loan utilizes future rental income to qualify for the mortgage loan on an investment property. Quick note, this program only works for investment properties and not on a primary residence or a second home.

DSCR Mortgage Loans Are Based On Cash-Flow of Subject Property

These mortgage loans are sometimes referred to as “cash flow” mortgage loans. Assuming the cash flow from the property can cover the total mortgage payment (including property taxes, insurance, and any homeowner’s association dues), typically you will qualify for this loan program.

DSCR Mortgage Loans Do Not Require Income Documentation of Borrower

This is not a “no documentation loan” but it is a “low documentation loan”. This is the main reason why real estate investors love this program. This program is not offered by every lender and is specifically geared toward real estate investors. This is a specialty NON-QM loan program Gustan Cho Associates are experts in. We have numerous different outlets that offer this program, so we are highly competitive as far as interest rates are concerned. How would a real estate investor know if they qualify for this DSCR mortgage program?

How Are DSCR Mortgage Loans Underwritten

Formula to calculate debt service coverage ratio- Before we dive into the specific loan requirements, we must understand the formula to calculate in layman’s terms, your debt service ratio must be at least 1% (ideally 1.25%). Assuming your total housing expense is covered by the future rents you will receive from the property, you should qualify for a DSCR loan (other loan requirements must be met). If you are not at a full 1% debt service ratio but are very close, you may need to put down additional money to lower your overall monthly housing payment obligation.

Loan Level Pricing Adjustments on DSCR Mortgages

Loan Level Pricing Adjustments on Second Homes and Investment Properties on DSCR Mortgages

Loan level price adjustments by Fannie Mae and Freddie Mac were updated in 2022. If you are a real estate investor, you more than likely know about the crazy loan level pricing adjustments added by Fannie Mae and Freddie Mac. These adjustments can significantly impact your ability to qualify for a conventional investment property mortgage.

Benefits of Debt Service Coverage Ratio Mortgages For Investors

If you have numerous financed properties, you more than likely claim little income or a loss on your federal income tax returns for your current rental income. These tax write-offs are a major advantage for real estate investors. But the tax savings can come back to bite you in the butt when trying to purchase an additional investment property. Getting tax returns involved can be a deal killer and scare many real estate investors away from purchasing their next investment property. That is why DSCR loans are so popular.

Mortgage Rates on DSCR Mortgage Loans

The new loan-level price adjustments by Fannie Mae and Freddie Mac will be put in place in about two weeks, starting April 1, 2022. So, you must close and fund your mortgage loan within the next two weeks to not pay these increased premiums. The chances of that are highly unlikely in today’s competitive market. That being said, you can expect to have additional hits to your interest rate for all second homes, investment property, and high-balance mortgage loans. Loan level price adjustments have always been part of the conventional mortgage lending criteria put forth by the Federal Housing Finance Agency (FHFA). This information is available to the public and all lenders must utilize the pricing adjustments.

Factors Affecting Pricing on DSCR Mortgage Rates

Loan level pricing adjustments are based on your property type, credit score, loan to value threshold, and loan program. While the motives for raising low-level pricing adjustments for second homes are still unclear, we speculate that this is put in place to allow more first-time homebuyers to enter the housing market. In 2021, we saw real estate hedge funds purchase many single-family homes taking away from the already scarce inventory.

The Bullish Housing Market Makes DSCR the Mortgage Loan of Choice 

Individuals and families purchasing second homes and investment properties also remove inventory from potential first-time homebuyers. While many think the American dream is unattainable, mortgage lending criteria are strict but put in place in a way to help families. The last thing our country can handle right now is a real estate crash like we saw in 2008. Our economy is already in a tailspin, so high qualification thresholds are a way to protect the real estate economy. The underwriting guidelines are put in place to protect families from overextending their housing budget as well as protecting lenders from defaults.

Benefits of DSCR Mortgage Loans?

What Are DSCR Loans?

Why are DSCR loan programs so popular? If you are a seasoned real estate investor, you know how the industry works. Many real estate investors are cash buyers meaning they can purchase a home quickly. Utilizing a DSCR loan has a much faster closing time frame compared to a conventional mortgage loan.

How Do I Calculate Loan Using DSCR?

Since there are fewer documents for the underwriter to verify, these loans can be completed very quickly. Typically, in the time it takes to order an appraisal and get your title report, these loans are just about ready to close. Making you closer to a full cash buyer. This will help your offer be more competitive compared to the other investors looking at the same property. In the crazy real estate market of today, anything to have your offer stick out to the seller will help you win the bid!

Documents Required on DSCR Mortgage Loans

Low documentation. The fact that many real estate investors are all over the place with paperwork makes this loan incredibly enticing. Besides the information on your federal income tax returns, a conventional mortgage loan may require additional documentation such as a lease agreement, utilities and expenses, and possibly a profit and loss schedule for all rental properties owned. Since DSCR loans require minimal documentation, no income or job history is required. This will help most investors who may not have a job documented or new investors who will not have seasoned rental income for an underwriter to verify.

Easy DSCR Mortgage Process Makes It Popular For Real Estate Investors

The total number of finance properties. If you are familiar with Fannie Mae mortgage lending, you know the limit you at a total of 10 financed properties. While this may not be an issue for most Americans, a real estate investor may have more than 10 finance properties. That makes the DCSR loan very popular. There is no limit to the total number of financed properties allowed.

Flexible Terms on DSCR Mortgage Loans

DSCR mortgages have flexible loan terms. Besides the down payment, there are flexible loan terms compared to conventional lending. For instance, you can utilize a DSCR loan to do a cash-out refinance on one of your investment properties. There is no limit to the amount of cash you can receive based on the equity in your home (must keep 20% equity). Some of these programs even offer interest-only payment options. You may use a DSCR loan for short-term rentals such as Airbnb and VRBO properties. Depending on the DSCR ratio, minimal reserves are required compared to conventional mortgage financing. In short, these loans are a great way for a real estate investor to enter the industry or for a seasoned investor to add to their portfolio.

Non-QM Loan Programs Available at Gustan Cho Associates

Non-QM Loan Programs Available at Gustan Cho Associates

There are countless non-QM mortgage products offered by Gustan Cho Associates. Gustan Cho Associates are experts in mortgage lending without lender overlays and experts in specialty mortgage programs. NON-QM mortgage lending is becoming more and more popular with the country recovering from the COVID-19 coronavirus outbreak. Many self-employed individuals took a massive financial hit during the pandemic. We offer many loan programs geared to helping self-employed individuals. Some NON-QM mortgage programs we have available include our bank statement loans, one-year tax return loans, 1099 mortgage loans, DSCR mortgage loans, and even foreign national programs.

The Emergence of New Non-QM Loan Programs

NON-QM mortgage lending took a huge hit at the start of the pandemic but has recovered quickly. Your basic NON-QM mortgage programs are available again and more specialty programs are rolling out now that the pandemic looks like it is nearing an end. Lenders and investors are getting creative with mortgage lending because agencies such as Fannie Mae and Freddie Mac are adding so many layers to their qualifications.

Bank Statement Loans for Self-Employed Borrowers

The most common NON-QM mortgage loan is a bank statement loan. We are experts in this area of mortgage lending and have helped many self-employed borrowers qualify for a home. Utilizing your business or personal bank statements to calculate income from your self-employed business will get around us utilizing your tax returns to calculate income. Many self-employed individuals have extensive write-offs on their tax returns to minimize their federal tax obligation. Which can disqualify you for a conventional mortgage loan. If you have been turned down for your everyday mortgage program, you may still qualify for a NON-QM mortgage program. We encourage you to reach out to our team of experts. You may email [email protected] or call Mike Gracz on 630-659-7644. We are available seven days a week to answer your mortgage-related questions.

Start The Mortgage Process Today

Gustan Cho Associates are experts in real estate investing. We have helped numerous clients build wealth with the ability to utilize DSCR loan programs as other NON-QM mortgage loan options. Our loan officers are highly experienced in the NON-QM mortgage realm. Most banks and lending institutions do not have access to these specialty programs. Our team does and we are ready to help all real estate investors. Our loan programs set us apart from our competition and help us stay competitive in a cutthroat market. We will assist you in purchasing your first or next investment property. For any specific questions on the DSCR program or other mortgage programs offered by Gustan Cho Associates, please call Mike Gracz and 630-659-7644 or send an email to [email protected]