Real estate investors may find it beneficial to apply for a DSCR mortgage loan, a unique option for those with a property for rental income.
There are some mortgage loans that just about anyone can apply for, and others designed for specific purposes. A debt-service coverage ratio (DSCR) loan falls into the latter category. Your average potential homebuyer won’t be going for this type, but real estate investors could find it a smart route. People with a property for rental income can apply, but a key factor in getting approved is a positive cash flow. Now, if you want to get into the nitty-gritty, we’re answering the question of the hour: What is a DSCR mortgage loan?
What is a DSCR Mortgage Loan?
A DSCR loan is a non-qualified mortgage (non-QM) loan designed for those who may not qualify for traditional mortgage loans because of their income, credit score, etc. It’s intended for people who have a property they rent out for income, so the focus of the loan is on the property’s income success. Typically, a DSCR loan has a 30-year term period. “What makes DSCR loans unique is that the primary qualifying factor is whether or not the property has a positive cash flow,” says Ben Fertig, founder and president at Constructive Capital.
How Does a DSCR Mortgage Work?
The key to a DSCR loan is that the property generates enough rental income to cover its debt obligations. While the lender will look at the borrower’s personal information, including their credit profile, liquid assets and major financial events, the focus is on the income from the rental property and if it has positive cash flow. To get a DSCR loan, look for a top mortgage lender offering this type.
“When an investor wants to purchase or refinance a rental property, the lender assesses the property’s expected rental income and compares it to its expenses, including loan principal and interest, property taxes, insurance and homeowners’ association dues, if applicable. If the property’s income to expenses ratio is 1.0 or higher, the property is considered cash flow positive,” says Fertig.
The Bottom Line
A DSCR loan isn’t your typical mortgage loan. It’s for those with an investment property – and that investment profit is in the green. While you need a substantial amount down and the interest rates tend to be higher, those factors typically don’t hit as hard as they would in a traditional primary residence loan scenario. It’s important to find a lender with expertise in this type of non-QM loan so you can have a smooth process and a digestible interest rate.
Why You Should Trust Us
Here at Benzinga, we answer all your mortgage questions – no matter how general or niche they are. That’s because we have around 25 million readers each month looking for answers to their most pondered-over financial questions. Our mission is to present you with clear facts so you can make the smartest decisions for your personal situation.
Caitlyn Fitzpatrick, the author of this article, has been an editor and writer since 2014. As a commerce journalist, she understands that spending your money is always a big decision (whether buying a product or signing on the dotted line for a 30-year mortgage). To gather real-world insight, we spoke with Ben Fertig, founder and president at Constructive Capital, on what we need to know about DSCR loans.
FAQ
What is the downside to a DSCR loan?
The good news is that the downsides of a DSCR mortgage loan are minor, according to Fertig. “DSCR loans typically have higher interest rates than conventional loans. However, in real estate investment, interest rates are less important than the overall return on investment,” he says.
How much do you need down for a DSCR loan?
That depends on the lender, but you can expect a down payment of about 20% to 25%.
Sources
- Ben Fertig, founder and president at Constructive Capital
About Caitlyn Fitzpatrick
Caitlyn Fitzpatrick has been a professional writer and editor since 2014 and entered the commerce journalism world in 2017. She’s passionate about helping readers make smart buying decisions by using data insights and interviewing experts. Most recently, Fitzpatrick was the Senior Shopping Editor at Trusted Media Brands, where she led affiliate content on Reader’s Digest. In addition to Benzinga, Fitzpatrick’s work can be found in a range of publications, including U.S. News & World Report’s 360 Reviews, Today’s Parent, Betches, WhatToWatch.com, PS (formerly Popsugar), and more.