More and more people are investing in real estate, and individuals are making up a larger share of rental property owners than ever before.
If you don't work with a large commercial business, it can be difficult to figure out how to finance your property purchases.
Luckily, the benefits of DSCR loans make them a great choice for investors who are in this situation.
What is a DSCR loan? And how can it help you finance your investment purchases? We lay out all the details below.
What is a DSCR Loan?
DSCR stands for debt service coverage ratio. For a DSCR loan, lenders use this ratio to determine your eligibility to receive the loan.
This is different than a more traditional mortgage loan, where lenders use your personal tax return to determine your loan amount and interest rates.
With a DSCR loan, your property's cash flow determines your loan eligibility completely. There is no income verification or approval process with this kind of loan.
This key feature means that DSCR loans are geared toward real estate investors, not those looking to purchase a residential property for personal use. If you are self-employed and looking to purchase your own home, there are other ways to qualify for a mortgage.
How Does It Work?
To determine whether you qualify for a DSCR loan, lenders calculate your debt service coverage ratio.
What does that mean? Basically, they compare the net income of the property you want to purchase to the amount of mortgage debt it will hold. This is generally calculated on a per-year basis.
This ratio helps lenders determine whether you will be able to pay back your loan and interest on time. A competitive debt service coverage ratio is 1.25 or above.
Pros and Cons
As with all kinds of loans, there are both benefits and downsides to taking out a DSCR loan.
Lenders who give out these loans may require a larger downpayment or higher interest rate from you than they would with a traditional mortgage. This means you'll pay more money in the long run, and you have to have more capital upfront.
If this is the case, why take out a DSCR loan? Well, they're a great option if your rental properties make up a majority of your income stream. Your yearly tax filings won't accurately reflect your income and may disqualify you from accessing other kinds of loans.
There's also no limit to how many DSCR loans you can have at one time. You can use these loans to build up a large investment portfolio quickly, as long as you are able to qualify for each new loan you take on.
Choose the Loan That's Right for You
Ultimately, only you know if taking out a DSCR loan is the right choice for you. They have high interest rates and require a large down payment.
All loans are subject to credit approval. Interest rates are subject to change daily and without notice. Current interest rates shown our indicative of market conditions and individual qualifications and will vary upon your lock-in period, loan type, credit score, purpose and loan to value.