Investing in property can be a strong way to build a steady financial future. But financing for these investments can be difficult. With limits on debt-to-income ratios, many investment mortgages are not available, especially for investors with numerous properties. Fortunately, the DSCR loan program may provide a solution.
What is the DSCR Loan Program?
The debt-service coverage ratio is a calculation of the total income brought in by a property compared to the total mortgage cost. It is usually calculated by taking the total income, called the net operating income or “NOI” and dividing it by the total debt.
For example, let’s suppose a property has a total monthly income of $1,500, and the total mortgage payment is $1,200. In this case, the DSCR equals 1.25. (1,500/1,200 = 1.25.) This means that there is a positive flow of cash and the property (as we will see) can qualify for a no-ratio DSCR program. If the income from the property is the same as the cost of the mortgage (for example, both are exactly $1,500), the DSCR would be exactly 1.0.
This is a useful way for mortgage lenders to qualify mortgages and make lending decisions. By looking at the DSCR, they can see that the home should bring a positive income. Issuing a loan, therefore, brings less risk.
Our Debt Service Coverage Ratio (DSCR) Loan Program
These programs are typically looking for a DSCR of 1.0 or higher. Obviously, the higher the DSCR, the more income is being brought in, which means lenders are even more likely to issue loans on these properties.
DSCR Loan Details
With these loans, we require that 75% of the gross rents are supported by the current rents or market rents over the entire property. This must be fully amortized and include property taxes and insurance.
We can also work with investors who allow a fully-executed lease and evidence of deposit before closing. This is an option if market rent from an appraisal does not support the DSCR requirements. Basically, if the DSCR is low, we can help you find an investor who will provide options for securing the loan.
There are even investors that will allow loans on a property that has a DSCR below 1%. In fact, you can find investors willing to go as low as 0.5%. However, these programs usually bring higher interest rates simply because the risk to lenders is enhanced.
Some investors also utilize a 30-year fixed-rate interest-only program. With this program, the loans have a fixed interest rate, but you only pay the interest for the first ten years. After the ten years are complete, the loan becomes fully amortized at the same interest rate. There is a benefit here, as any additional payments are applied to the balance and minimize the overall cost. By using interest only-programs, property investors can enhance their cash flow and maintain a positive stream of working capital.
It should be noted that interest-only programs using the DSCR structure may have a prepayment penalty. Usually, this is an optional prepayment clause that lasts five years from the start of the loan. The longer the pre-payment period, however, the lower the interest on your mortgage.
One of the most enticing features of this program is the fact that you can secure financing up to $3.5 million using the DSCR loan. This makes it one of the most useful loan programs investors will ever find.
While the program may not consider your debt ratio, it will take into consideration your credit score. To use the program, you need a score of at least 640. This is not a high score, but it’s not considered poor credit. 640 is a fair credit score, so most buyers who have been more or less responsible with their debts should qualify for this program.
For a loan up to $1 million, you will need cash reserves of six months. “Cash reserves” are simply sums of money held in bank accounts that act as a safety net in the event of financial difficulty. They are generally calculated by the month, in this case, you’ll need the equivalent of six total payments sitting in savings. If the loan payment, for example, is $3,000, you’ll need $18,000 in total cash reserves. This usually needs to be liquid or near liquid assets, such as cash or investment accounts.
For loans up to $2 million, you may be able to secure the loan with only a 20% downpayment. Of course, this is still a large sum, but it is far lower than the amounts required by many other loans, especially large loans on investment properties.
Like all loans, there are limits. Applicants for this program are limited to eight loans total, which are either issued or purchased by the investor, and the total cannot exceed $10 million. Applicants who have less than 15 financed properties are not eligible for any second-home or investment-property transaction, including purchase, refinance, or cash-out refinance. Applicants can, however, have investor financing on a maximum of 10% of the properties in a PUD or condominium.
If you are purchasing a property in a project with over ten units, financing is limited to only one property.
This program gives investors a significant advantage. It’s especially useful in Southern California, where market rents are not supported by the high price of purchasing properties. In this region, few investors offer a true no-ratio program.
Build Your Financial Strength with the DSCR Loan Program
If you want to learn more about our true no-ratio programs and DSCR loans, contact our team today. These programs are excellent for investors of all types, from seasoned pros to new investors looking to purchase their first property.
We’ll make sure you have the right information to make the right choice for your future investments, so give us a call or fill out our contact sheet today!
