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June 22 2022

Understand How to Buy Investment Properties With a DSCR Loan

Today I want to dig a little deeper into the Debt Service Coverage Ratio option as an investment loan. If you’re looking for wealth building opportunities through real estate, this could be a good option to game plan for or take advantage of now.

DSCR: Debt Service Coverage Ratio

A DSCR loan qualifies the rental value of the investment home as the ability to repay the mortgage. DSCR loans are not available for primary dwellings. Since investment properties are not primary dwellings and they generate monthly revenue on their own, the lender does not take into account the owner’s personal income nor debt. If the revenue from the investment property each month covers the cost of the mortgage, then the purchase of that home qualifies, plain and simple.

Here’s a Few Keys to Remember on a Debt Service Mortgage

  1. The owners personal debt to income does not matter
  2. The Mortgage Debt of the house cannot exceed the Income Generated from that house or property.
  3. Since the DTI depends solely on the ratio between the mortgage and the revenue that the house generates, cash is king.
  4. Income Appraisals Establish Home Value
  5. Employment is Not Required

Cash Assets and Reserves for DSCR Coverage – Additional Guidelines

This means that a borrower must have enough cash assets to put down so that the monthly mortgage payment remains at or under the received rent (DTI.) This loan has reserve guidelines to follow as well. The monthly mortgage cost, times a certain number of months, equals the amount of cash reserves that must remain available in a liquid account. Some lenders require a minimum of 6 months reserves. Some lenders require a minimum of 12 months reserves. If I remember correctly, I think I’ve seen the lowest reserve requirements down to 3 months reserves, but lenders always required reserves for a Debt Service Coverage Ratio loan because if the property were to go vacant for any period of time, the owner must have allocated money to pay the monthly mortgage.

Income Appraisal for Rental Property

Since a DSCR loan is based on the income of the property, this type of loan requires an income appraisal. Rather than receiving a lump sum for the appraisal, the income appraisal will identify a monthly amount. Here are some examples if the income appraisal comes back at $2,300/mo, including $100/mo for taxes and $100/mo for insurance.

Example #1:

   A 6% rate equals a $350,000 purchase.

   A 7% rate equals a $315,000 purchase

   An 8% rate equals a $285,000 purchase

Brokers come in handy because they will review your information and calculate how much money you are approved to borrow. Check out this “Basic Home Purchasing Formula” to use when deciding on a home purchase.

Employment & Debt Scenarios for a DSCR Loan

The mortgage meltdown of 2008-2010 pulled the curtain back on many unscrupulous lending practices in America. Doing your own research into the loan program of your choosing is important. The DSCR loan is a great option because it still establishes Income Guidelines, even if the borrower has no paycheck. What if the borrower is a property manager and lives off the property of several investment homes? Well that’s not a job, and sometimes disqualifies a borrower.. What if the borrower’s DTI is maxed out? Personal DTI may disqualify this buyer, but it does not matter because the DTI is based off of the house itself.

Credit Scores DO Matter

A DSCR loan DOES require good credit. For the sake of home lending, I’m going to call “good” credit as anything above a 600 FICO score. Many borrowers would be surprised at what they might qualify for with the credit score that they have so long as they have enough cash or monthly income. DSCR loans typically require a 660 or even 640 credit score. Debt Service loans are Non-Qualified Mortgages (Non-QM) and therefore cannot be sold to a government insured program such as Fannie Mae or Freddie Mac. They are reputable loans however, and there are many investors on the secondary market that are willing to buy those loans, which make them valuable and obtainable by consumers. 

I mention this because any lender can make their own guidelines for a Non-QM loan, and if you have a lot of money out on credit, which can affect your FICO score, there still may be a broker that partners with a lender lower than 640 for DSCR loans. A borrower must still prove their credit worthiness in order to obtain a Debt Service loan.

Building Generational Wealth Through Investment Properties

Building generational wealth and savings is a great goal to aim for. If you’re looking for a Juicy Solution to mortgage lending, there’s plenty options out there. Give me a call or shoot me a text, I’d be more than happy to help get you going in the best direction.

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