WHAT IS A DSCR LOAN?

DSCR stands for Debt Service Coverage Ratio. It is a type of mortgage that qualifies a borrower primarily based on the rental income generated by the property rather than the borrower’s personal income.

I recently closed a loan for a client whose mother had passed away. He and his brother inherited her home. One brother wanted to keep the property, so he needed a mortgage to buy out his sibling’s share. The challenge was that his personal income was not sufficient to qualify for a conventional mortgage.

The solution was a DSCR loan.

Since the inherited property was going to become a rental, the lender focused on the property’s income potential. The borrower provided a lease agreement showing the expected rent. In addition, the lender ordered an appraisal that included a Form 1007, which analyzes market rents for similar properties in the area.

The lender then compared the expected rental income to the property’s monthly expenses, including principal, interest, property taxes, and insurance. If the rental income is sufficient to cover these costs, the borrower may qualify regardless of personal income.

Some DSCR programs are even more flexible. In situations where the rent does not fully cover the payment, certain lenders may still approve the loan, although the interest rate is usually higher.

This can be especially useful when purchasing a multi-unit property where some units are vacant. Even though current rental income may be insufficient, the lender can use the market rent analysis from the appraisal to estimate future income.

DSCR loans can be used for:

Purchasing rental properties
Refinancing existing loans
Cash-out refinancing
Single-family homes
Two-to-four-unit properties
Multifamily properties with five or more units
In some cases, second mortgages on investment properties

As I often tell my clients, there is usually a solution to every financing challenge. The key is finding the right loan program for your specific situation.

If you have a financing need involving rental property, inheritance, refinancing, or investment real estate, let me know. I will do my best to find the right solution for you.

Manny Kagan,
Your professional mortgage broker since 1983
(415) 225-7920; mannykagan@comcast.net