DSCR Loan Qualifications
A Debt Service Coverage Ratio loan is useful for real estate investors because it is based on the rental income of the property and not the borrower.
The typical investor is used to conventional real estate financing that qualifies an applicant on personal characteristics such as verified employment and income, previous years tax returns, and personal financial statements. Also, you can expect the loan amount to connect to your personal DTI ratio (Debt to Income), meaning if this is an additional property to your residential home, you may have a debt level that is too high for your personal (i.e. employment) income.
A DSCR loan is more about an evaluation of the PROPERTY and its economic characteristics, i.e. its value and its income performance. The income of the property pays for the debt of the property. This also allows the real estate investor to scale because each new property is evaluated on its own income level relative to the debt level needed to purchase and hold the property.
A DSCR loan will still need to have a personal credit check performed, because the lender will want to understand the likelihood of the borrower to pay his or her bills.
So how does a real estate investor qualify for a DSCR loan?
- a worthwhile rental property (one that produces more than enough income to pay a loan to buy and hold the property)
- personal credit of at least 660 (while 700/720+ will get better terms) and sometimes a clean background check without fraud or felonies
- a business entity to hold the property (e.g. LLC) as most serious real estate investors are using a company to own and manage the property (and service the loan note)
- enough liquidity to pay the costs to close the loan (more needed to buy the property, less needed for a refinance).
Belcanto Capital can provide a DSCR loan quote for a purchase or a refinance of a rental unit. Please submit your scenario here: https://belcanto-capital.com/investment-property-quote/