DSCR stands for Debt Service Coverage Ratio.
As most readers probably know by now, these loans allow investors to buy almost any investment property with as little as 20% down – without verifying ANY income.
Investors can qualify based solely on market rents, and properties do NOT need to cash flow, meaning that the monthly rent can be less than the housing payment.
What most readers don’t know though is how much DSCR loans have expanded over the last year.
We now have dozens of investors vying for these loans – to accommodate almost anyone. And the competition is driving down rates and increasing guideline flexibility.
- Low-Rates. For strong investors with properties that cash flow, the rates are now as low as what Fannie Mae and Freddie Mac offer.
- Adding Asset Depletion. For investors who want the low rates that come with strong properties, but the rent is not quite high enough – we can augment the rental income with “asset depletion income.” Asset depletion income is calculated simply by taking the total amount of assets (stocks, retirement, cash) that will remain after the loan closes and dividing that number by 60, e.g. $500,000 of assets yields $8,333 of extra income.
- What If Rents Don’t Cover Housing Payment. This is not a deal killer, but it will result in a higher interest rate and a minimum down payment of 25% in most cases.
- How Do We Come Up With Rent? Some investors use the higher of the market rate or the actual lease. And some correlate to the lease only. The market rate is estimated by the appraiser.
- Far Better Than Hard Money. Investors should only take a hard money loan over a DSCR loan when properties have severe condition issues that make them ineligible for institutional financing.
For years, lenders only offered hard money loans (with 10%+ rates, multiple points, and 35%+ down payments) to investors who could not verify sufficient income on tax returns. Now, however, most of those investors would be crazy to take a hard money loan, as DSCR loans offer much lower rates, much smaller down payments, and fewer points and fees.
