Investment Property Loan (DSCR)
Investment Property Loan (DSCR) is Available!
Is Investment Property Loan (DSCR) Right For You?
What Is an Investment Property Loan?
An Investment Property Loan is a type of non- traditional loan for real estate investors. Lenders use an Investment Property Loan to help qualify real estate investors for a loan because it can easily determine the borrower’s ability to repay without verifying income.
How Does an Investment Property Loan Work?
Because real estate investors write off expenses on their properties, some may not qualify for a conventional loan. The debt service coverage ratio loan allows these individuals to qualify more easily because they don’t require proof of income via tax returns or pay stubs that investors either don’t have or that don’t represent their true income due to write-offs and business deductions.
Benefits of Investment Property Loan
Benefits of Investment Property Loan for real estate investors include:
- Potentially quicker closing times
- No income or job history verification required
- No limit on the number of properties
- Loan amounts up to $5,000,000
- Unlimited cash out
- As little as 20% on down payments
- Interest-only loan option available
- Suited for new and seasoned real estate investors
- Both long-term and short-term rentals are eligible (Airbnb, VRBO, etc.)
- No reserves required on cash out loans, 6 months required on all other loans unless the DSCR ratio is less than 1.
What Is the Debt Service Coverage Ratio (DSCR)?
The Debt Service Coverage Ratio is a ratio of a property’s annual net operating income and its annual mortgage debt, including principal and interest. Lenders use DSCR to analyze how much of a loan can be supported by the income coming from the property as well as to determine how much income coverage there will be at a specific loan amount.
What Is a Good DSCR Ratio?
Many lenders will require a 1.25 DSCR to qualify for a DSCR mortgage loan. However, GM Brokerage allows real estate investors to qualify for a loan with a DSCR as low as .75 so that they can qualify with the cash flow of your property. Please note that interest rates are better on DSCR ratios of 1 or above and that a DSCR ratio of less than 1 requires 12 months of reserves.
When considering what a good DSCR ratio is, lenders need to ensure that a borrower is able to pay back the loan.
DSCR Formula Calculation
Annual Gross Rental Income/Debt Obligations = Debt Service Coverage Ratio
Example of Debt Service Coverage Ratio Calculation
A real estate investor might be looking at a property with a gross rental income of $50,000 and an annual debt of $40,000. When you divide $50,000 by $40,000, you get a DSCR of 1.25, which means that the property generates 25% more income than what is necessary to repay the loan. This also means that there is a positive cash flow in the lender’s eye.
