As a borrower, only the following are generally required to qualify for a DSCR loan.
Credit Worthiness
- Bankruptcy or Credit Event seasoning as little as 2 years
- Most lenders like to have VOM on your primary residence to verify that you haven’t been late and are current
- Some lenders do not look at your primary at all nor require you to have one. Some do.
- Liquidity. Lenders are looking available funds to cover down payment, title fees, prepaids, and reserves
- Reserves are typically determined by FICO and Experience, but vary from lender to lender. 3 or 6 months of reserves are most common
- Reserves can be cash, stocks, bonds, crypto, cash value of life insurance policies, retirement funds, etc… Real Property is not liquid.
- Some lenders will require a PFS (Personal Finance Statement). This shows your Assets, Liabilities, and Net Worth.
Employment History, Personal Income, and DTI are not calculated, needed, or taken into consideration for this loan type.
The property is the second piece of the equation. Debt Service Ratio Coverage (DSCR) is the primary factor.
- DSCR = Rents / PITIA (Principal + Interest + Taxes + Insurances + Association Fees)
- A DSCR of 1.00 is a break even point, neither positive nor negative cash flow
- Most lenders require a 1.00 to qualify but some are higher or even different based on the number of units of the property
- Some lenders do NOT require the property be occupied for purchases but do for refinances. Some do not require occupancy for either and rely on a 1007 to determine fair market rents to use in the DSCR calculation.
- If purchasing unoccupied, the lender will ask the appraiser for a Fair Market Rent schedule. This will determine the rents used to calculate the DSCR
- All DSCR programs require the property to be Non-Owner Occupied (NOO) Investment property. No Primaries nor Vacation Homes allowed.
- Typically, DSCR programs come with a Pre-Payment Penalty (PPP). Usually these are 3 or 5 years, but you can get rate adjustments by going up or down on them
Appraisal
- Every DSCR will require an appraisal
- The lender will order value and fair market rent valuations
- Certain lenders have lending restrictions on Zoning. Must be Conforming. If non-conforming or grandfathered in, sometimes they don’t lend on them
- Most will not lend on rural properties, if they do, they will max the LTV at 50-60LTV and jack the rate up by a full 1% or more.
- Some lenders allow you to recommend an appraiser and will use them. Usually private or capital funding groups.
- Most lenders require that you use an AMC and pay for the appraisal through the lender. This is most common.
This approach is most common with 1-8 units. Many commercial lenders will also consider operating expenses such as management fees, utilities, etc... into the DSCR calculation. Commercial lenders will typically have a minimum DSCR of 1.15 or higher, versus residential lenders at 1.00.
How does DSCR compare to Conventional lending?
DSCR Advantages over Conventional
- Far less paperwork required to qualify and easier underwriting
- No DTI calculation or restrictions
- No employment history required
- Few lenders impose exposure limits - no cap on number of properties you can own or have financed
- Product built specifically for investors and investment properties
- Blanket Loans group more than 1 property at a time into one loan.
Disadvantages or Similarities compared with Conventional
- Rates tend to be 0.25-0.75% higher than conventional, but sometimes are lower
- Prepayment penalties are standard on DSCR loans
- Similar origination costs and times to close
- Conventional loans are designed to protect consumers and are not conducive to investors in many cases
- Both require Comparable Rent schedules with the appraisal. Most lenders will use the lower of the FMR or Lease in place for the DSCR calc or DTI calcs
- Both come with Interest Only or ARM options, but are standard 30-year Fixed Rate Mortgages and function the same.