DSCR Loans: Financing Rental Properties with Property Cash Flow

DSCR stands for Debt Service Coverage Ratio. It's a financial metric used to assess a borrower's ability to repay a loan. DSCR loans are a type of mortgage specifically designed for investors looking to finance rental properties.

How DSCR Loans Work

• Focus on Property Cash Flow: Unlike traditional mortgages that rely on your personal income, DSCR loans evaluate the property's projected rental income to determine eligibility. This eliminates the need for extensive income verification.
• Less Demanding, Faster Closing: Qualifying for these loans usually do not require income documentation, and the approval process is streamlined with less paperwork required.

Things to Consider with DSCR Loans

• Rental Properties Only: DSCR loans are restricted to investment properties that will produce steady rental income. They cannot be used for your primary residence or for fix-and-flip projects.
• Positive Cash Flow is Key: For DSCR loan approval, the property's rental income needs to comfortably cover the loan payments (principal, interest, taxes, and insurance). This ensures a positive cash flow, which is essential for DSCR loans.

Understanding Your DSCR Ratio

A DSCR is calculated by dividing a property's net operating income by its total debt service. Here's a breakdown of what different DSCR values mean:

• DSCR of 1: This indicates the property's income exactly covers its annual debt obligations. This generally get you most favorable most aggressive interest rates available for program.
• DSCR Below 1: This suggests negative cash flow. Near best interest rates available.
• DSCR of 0.95: In this case, the income only covers 95% of the annual debt obligations, you may qualify for a loan, however, the interest rate might not be the lowest, but it still opens doors to achieving your goals.

A Good DSCR Ratio

There's no universal standard, but a DSCR of at least 1.25 is generally considered very strong. This indicates the property generates enough income to cover its debts, providing a healthy financial buffer.

DSCR Loans: A Viable Option for Investors

DSCR loans offer an attractive alternative for investors seeking to build their rental property portfolios. They cater to those with unique financial situations by focusing on the property's income potential. Whether you're a seasoned investor or just starting out, DSCR loans can be a valuable tool for financing up to 20 rental properties, and YES you can also close in the name of an LLC! We can help you find the perfect loan option to fit your specific needs. Call one of our Mortgage professionals today and lets get you started.