How Do DSCR Loans Work?

If you want to qualify for a loan based on the money you earn from your rental property, DSCR mortgage loans in Arizona and Colorado may be the best solution.

When you apply for a DSCR mortgage, you can do away with submitting the usual requirements like W2s, employment data, tax returns, and payslips, to name a few.

If you haven’t heard about a DSCR loan, we’ll see how it works and learn about its advantages. 

What is a DSCR, and how does it work?

The DSCR, or Debt Service Coverage Ratio, measures a borrower's available cash flow to pay current debts. A DSCR shows whether a real estate property makes enough money to pay a mortgage.

As a real estate investor, you can apply for a DSCR loan or refinance an existing one. Lenders would evaluate the DSCR and use it to determine the maximum loan amount. 

A DSCR is a good loan option since you don’t have to submit proof of income, tax returns, and employment information to qualify.

Loan terms for DSCR mortgages range from 5 to 25 years. How long your loan payment is will be determined based on the type of property and projected cash flow.

If you want to know more about DSCR loans, contact Castle Rock Mortgage today.

What are the advantages of a DSCR mortgage?

Here are the benefits of getting a DSCR loan:

  • Since you don’t need to submit your financial documents to apply for a DSCR loan, it allows investors who may not have plenty of liquid assets.

  • DSCR loans have a streamlined application process that closes faster than traditional mortgages.

  • Less paperwork since you don’t need to submit employment and income documents, unlike traditional loans.

  • More flexible underwriting guidelines.

  • No personal income verification is needed.

  • You can finance properties with little rental history.

  • You are allowed to get many loans for different properties simultaneously.

  • There is no limit to the cash you can take out with a DSCR loan, which allows you to cover significant expenses.

  • DSCR loans are suitable for both novice and experienced real estate investors because of the faster turnaround time and fewer requirements.

When you apply, lenders need information about your investment property, like the address, number of units, square footage, and estimated rental income.

A DSCR loan also requires an appraisal so that lenders can determine the DSCR loan’s value compared to others in the market. Property appraisal also ensures that you are getting a fair price.

How can you qualify for a DSCR loan?

To be eligible for a DSCR loan, your property’s rental income must meet or surpass your lender’s coverage ratio requirements. The ratio is calculated as monthly rental income divided by mortgage payment, ranging from 1.0x to 1.5x.

Let’s say your ratio is 1x, and the property income is $5,000 monthly, the maximum mortgage payment allowed is $5,000. 

Lenders may require a credit score of 640, which is similar to the score needed to qualify for a traditional investment loan. Minimum credit score requirements may vary from lender to lender.

Since lenders take on higher risks, downpayment requirements are in the 20 to 25% range. 

Closing costs on DSCR loans are comparable to standard investment loans and include lender fees, appraisal fees, title fees, and escrow fees. 

What type of properties can you buy with a DSCR loan?

You can buy a wide range of properties with a DSCR loan, either short-term or long-term rentals or even properties that may be your temporary or permanent residence.

The bottom line is that if you show that the property will generate enough cash flow to pay back your loan, you have a higher chance of getting loan approval.

Is a DSCR loan the right one for you?

As a real estate investor, you can avoid the high rates of private loans, strict requirements, and lengthy approval processes with traditional mortgages. 

DSCR loans give first-time investors a chance to build their portfolios faster.  

Castle Rock Mortgage Investor Cash Flow Loans

If you are looking to buy in Arizona or Colorado, Castle Rock Mortgage offers

investor loan programs that cater to real estate investors who need financing without disclosing employment or income.

We just compute your cash flow using the DSCR or Debt Service Coverage Ratio Formula and check your credit score to determine if you can repay the loan.

Call us to learn more and help you get started on your real estate investing journey.

 


* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.