Debt Service Coverage Ratio (DSCR) Loans are designed for seasoned investors looking for an easier way to buy their next investment home, but without the hard money interest rates and terms. DSCR loans is residential investment lending that is based on the cashflow potential of the home.
DSCR Loans, unlike other loan programs that use tax returns and require a mountain of paperwork, this program uses the cash-flow potential of the home as the "income" for the home and compares it to the expenses.
When the appraisal is ordered, a licensed appraiser performs a standard residential appraisal report, along with a supplemental report called a Market Rental Analysis which provides the average market rent for similar homes in the surrounding area.
This number is then compared to the full monthly payment on the new loan. (example: A ratio of 1.0 means that the rent supports 100% of the new payment)
This program is similar to a commercial loan program that uses debt-service to qualify; however the approach for residential DSCR programs is much simpler, and the scope, due diligence and documentation is significantly easier.
Here is the basic formula to determine the DSCR ratio:
GROSS RENTS ÷ TOTAL HOUSING PAYMENT
Total Housing Payment = PITIA
(Principle + Interest + Property Taxes + Insurance + Association Dues)
The loan terms for a DSCR Loan are determined by the following criteria:
· DSCR Ratio - (how well the property cash-flows) – Some lenders will finance properties with a ratio of 0.75 and higher.
· The applicant's middle FICO score
· Size of the down payment.
· Prepayment Penalty (optional) - Options include: no prepayment penalty, 1 year, 2 year, or 3 year (ask your Loan Originator for details)
The minimum down payment for seasoned investors can vary but is usually between 15% and 20%. For first-time investors, the minimum down payment can be as high as 30%. (a seasoned investor is defined as an applicant with 12 months of landlord experienced in the past 12 months).
Applicants must have 3 active credit tradelines appearing on credit history for the most recent 12 months, *OR* 2 active tradelines for the most recent 24 months. Applicants must have prior homeownership experience in the most recent 3 years, and have a clean, verifiable residency payment history in the most recent 12 months.
For more information on DSCR Loans contact: info@indulgevacationrentals.com