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Are you looking to acquire a Debt Service Coverage Ratio loan, also known as a DSCR investment property loan? Here’s how to avoid using hard money and qualify for investment property acquisitions and refinances by using the cash flow of the investment property itself.

Traditional mortgage lending requires tax returns during the loan approval process, a Debt Service Coverage Ratio loan for investment property financing do not.

Providing tax returns does not always give an accurate portrayal of true cash flow, due to the way traditional loans are underwritten (which often applies a default vacancy factor, minimum global debt service, and other guidelines and overlays). Real estate investors and others whose tax returns do not accurately portray their financial picture can use no tax return investment property loans as a powerful financing solution.

This is a great option for real estate investors that allows qualification based on simply the cash flow of the property being financed. If the rental property is cash flow positive, that will constitute sufficient qualifying income.

Here’s all you need to know about how a Debt Service Coverage Ratio investment property loan works.

A. What is a Debt Service Coverage Ratio Investment Property Loan?

Sometimes called “Investment property loans” or “rental loans,” Debt Service Coverage Ratio investment property loan does not consider a borrower’s income in the traditional sense.

The “cash flow” is just the monthly rental amount the property brings in. For example, a property renting for $2,000/month would be attributed a qualifying income of $2,000/month. The main requirement for these investment property loans is that the monthly rents cover the monthly expenses. It is that simple.

Not only is a borrower’s income not considered in the loan application process, investment property lenders do not request income amounts, in fact there is no income verification of any kind. No letters from employers, no W2s, and no pay stubs. Again, the income of the investment property is simply the cash flow of the property.

B. Why Use a Debt Service Coverage Ratio Investment Property Loan?

Traditional mortgage lenders require tax returns, W-2s, and paycheck stubs in order to determine monthly income. Salaried and hourly borrowers would require the lenders to look at gross income for qualifying purposes. But for self employed borrowers, traditional mortgage lenders look at net income, the adjusted gross income showing on tax returns. This puts real estate investors and other self employed borrowers at a disadvantage.

However, rental loans are a great way for real estate investors to qualify for both acquisitions and refinances, without requiring bank statements or tax returns, and without having to qualify using a debt to income ratio. (Bank statement loans are also a great option for self employed borrowers, to learn more about bank statement loans click here.)

Borrowers that fall outside traditional underwriting guidelines but are looking for long term loans with more attractive rates than hard money loans can use the DSCR investment property loan to their advantage. These loans do not require tax returns, income or employment, or debt to income ratio calculations.

DSCR loans provide the flexibility and lessened documentation of hard money loans, but with rates closer to traditional financing.

This is a constantly evolving area of real estate financing that offers a powerful way to grow your real estate portfolio.

C. What Does a Debt Service Coverage Ratio Investment Property Loan Look Like?

1) DSCR – Debt Service Coverage Ratio

(a) Defined

The Debt Service Coverage Ratio, or DSCR, is how investment property lenders qualify borrowers for a loan. In essence, it is a comparison of the property’s monthly rental income versus monthly expenses.

DSCR provides a basis for determining the maximum loan amount an investment property can withstand. The higher the DSCR, the bigger the mortgage the property qualifies for. The monthly rents are put up against five (5) monthly expenses of the property:

    • Principal
    • Interest
    • Taxes
    • Insurance
    • HOA Dues (if any)

Together, these are often called the “PITIA.”

(b) Principal & Interest

The loan principal is the total loan amount, plus any costs of the mortgage that have been financed. Loans that are paid down over a set period (called “amortizing” loans) include monthly payments towards the loan principal.

Loans also often have an interest only option meaning that each month payments are made towards interest only. In this case, no portion of the principal loan balance is paid down over the interest only period. Instead, a balloon payment in the amount of the principal loan balance is due at the end of the loan term for interest only loans or principal payments will begin being paid at the end of the interest only period.

If the loan is amortized, (i.e., principal is being paid with monthly payments), a mortgage calculator can be used to determine monthly principal and interest payments, based on a given loan size, interest rate, and amortization term.

(c) Taxes, Insurance, & HOA Dues

The next portion of the debt component of the DSCR calculation consists of taxes, insurance, and HOA dues. These are fairly self explanatory. Calculate the monthly taxes and insurance for a refinance (or estimated monthly taxes and insurance quote for a purchase) and add in any HOA dues present.

The total of monthly taxes, insurance, and HOA dues (if any), along with principal and interest payments, make up all debts included in the no tax return investment property loan Debt Service Coverage Ratio equation. It’s that simple!

(d) Example

The property is rents for $2,000/month and has the following expenses

Principal & Interest  $1,000/mo
Property Taxes          $250/mo
Insurance                    $120/mo
HOA Dues                   $130/mo
TOTAL PITIA               $1,500/mo

In this example, the DSCR = $2,000 Monthly Rent / $1,500 Monthly PITIA = 1.33.

No tax return investment property lenders generally want to see DSCR above 1.00, and sometimes offer better pricing if the Debt Service Coverage Ratio loan is above 1.25-1.50.

2) Purchase v. Refinance

Use this loan for a purchase or a refinance of real property

Purchase they provide a great way to qualify for a purchase loan without tax returns, income or employment, or historical bank statements.

Refinancing, using an investment property loan, can be used to tap into a property’s equity and “cash out” the property. For example, if equity in a property increases, a real estate investor can obtain a investment property loan that provides cash in hand to be used for any business purpose.

3) Down Payment, Rates & Costs

No tax return investment property loans are long term solutions with terms of 15 or 30 years and can be fixed or adjustable.

The minimum down payment on an investment property loan is usually 20% (or minimum 20% equity for a refinance). Some lenders require up to 25% or more depending on credit, DSCR, and other factors including a reserve requirement. Larger down payments do often allow for a better rate.

Relatives ac provide gift funds as long as the funds only for towards sown payment, reserves or closing costs.

Rates for investment property loans are generally higher than traditional loans (based on increased perceived risk to lenders). All other typical loans fees are similar, such as origination points, broker and lender fees, appraisals, title and escrow, etc.

4) Personal Credit

Although personal income and debts are not considered for a no tax return investment property loan, personal credit is considered in the loan approval process. However, this requirement is typically no more scrutinized than a hard money loan.

Lenders want to see that a real estate investor is generally able to pay their bills in a timely fashion. In addition, having more than 1 or 2 late mortgage payments in the previous year can often require a loan approval exception, which can sometimes delay the process.

D. Advantages & Disadvantages

1) Pros 

  • No tax returns required
  • No employment or income required
  • Personal or business income not considered
  • No debt to income (DTI) ratio developed or considered
  • Allows real estate investors and self employed individuals to qualify when they otherwise cannot

2) Cons

  • Larger down payment than traditional loans
  • Rates are slightly higher than traditional loans (but not much more)
  • Some (but not all) lenders require landlord experience
  • Personal credit still plays a role


E. Finding the Best Debt Service Coverage Ratio Investment Property Loan

Many rental property loan lenders do not have a retail channel, meaning they will only fund loans using a broker. The best brokers spend many hours scouring thousands of loan programs to find the best rates and terms for their clients. It is in the broker’s best interest to find the lowest rate and most favorable terms available in order to close the deal.

If you are a real estate investor and considering purchasing or refinancing a property, no tax return investment property loans are a great way to avoid hard money. See how this program can work for you, click here to speak with a loan officer and get a quote.

F. Bottom Line

DSCR investment property loans are a great way to avoid hard money with a viable long term financing solution for real estate investors. The lessened documentation and underwriting requirements are similar to hard money loans, while rates and fees are more akin to traditional loans.

Whereas traditional mortgage lending requires tax returns during the loan approval process, investment property loans do not. With these loans, real estate investors are able to purchase or refinance a property with no employment required, no personal income considered, and no debt to income ratio developed.

The only cash flow that matters is the rental income. That’s it. If the property debt services, the property will qualify.

Speak to a mortgage professional at Valor Lending Group to discuss how you can qualify.

By: Gregory Riggs esq.

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