If you don’t have the capital to purchase a one- to four-family rental property outright, numerous loan options exist. The Debt Service Coverage Ratio (DSCR) loan is one of the best and fastest options for many investors due to simple qualifications and fast processing times. Below, you can learn more about using DSCR loans to acquire the properties that will boost your revenue. 

What is a DSCR Loan?

DSCR stands for Debt Service Coverage Ratio, and in layman’s terms, it refers to the ratio of cash that you have available to service your existing debt. Simply put, rather than relying on your employment history, tax returns, and FICO score, lenders and brokers qualify you for a mortgage based on your investment properties’ cash flow. Often, real estate investors don’t qualify for standard loans because of the expenses deducted from their properties. With a DSCR loan, the only real consideration is the income you earn (or plan to earn) from your property. 

Who Should Consider a DSCR Loan?

DSCR loans are fantastic options for several types of investors.

• Self-employed investors who have complex incomes often struggle to qualify for traditional mortgages despite their ability to repay. Because DSCR loans do not require income documentation, they are often the better choice.

• Investors who have reached traditional property credit limits may be unable to qualify for further funding until other loans have been repaid in full. Freddie Mac, for example, only allows borrowers to finance a maximum of one- to four-unit properties. DSCR loans can help investors overcome these limitations. 

• Investors who do not want to provide W-2 forms, paystubs, or tax returns can still qualify for DSCR loans, and the process is often much quicker than with traditional mortgages. 

DSCR loans are perfect in each of these situations, whether investors plan to trade the property later or hold it for rental income. 

Do You Qualify for a DSCR Loan?

Like traditional mortgages, individual lenders set their own requirements for DSCR loans based on macroeconomic conditions. Determining your debt service coverage ratio is straightforward; divide the net operating income (NOI) of the property by the loan’s annual debt service. If your result is 1, this means that your property generates exactly enough revenue to cover your debt. If your result is 1.25 or more, your property generates more than enough revenue to service your loan. Lenders typically look for ratios close to 1.25 or more, but this can vary. 

If you are looking for the best way to finance a one- to four-unit rental property and you have complex income, you’ve reached traditional property limits, or you simply don’t want to provide personal income information, a DSCR loan is a fantastic alternative with competitive rates. Contact us today to get started.