In recent years, many real estate investors have started using Debt Service Coverage Ratio (DSCR) mortgage loans as their go-to investment property mortgage. These investment property loans offer investors alternative qualifying requirements compared to traditional investment property mortgages that rely on a borrower’s employment and income. DSCR loans are designed to qualify borrowers using the estimated monthly rental income generated by an investment property.
What is Debt Service Coverage Ratio?
Mortgage lenders, like Newfi, use a Debt Service Coverage Ratio to determine if a borrower’s estimated monthly rental income will cover the properties monthly mortgage payments and the fixed expenses associated with the property.
How do Lenders Determine Estimated Monthly Rent for a DSCR Loan?
To accurately determine a borrower’s estimated monthly rent on a DSCR loan, lenders have to establish the average rental income for the area. During the appraisal process, lenders ask the appraiser to complete a 1007 Rent Schedule Form. A 1007 Rent Schedule Form is a property comparison form that looks at the average rental income for similar rental properties in an area.
How to Calculate DSCR for a Mortgage
To calculate DSCR, lenders use the property’s estimated monthly rent and divide it by the monthly fixed expenses.
DSCR = Monthly Rental Income/Monthly Fixed Expenses
A borrower’s monthly rental income is the total rents that they receive from their tenant every month. Monthly fixed expenses include the following: principal and interest payments, taxes, insurance, and HOA dues. These expenses are sometimes referred to as PITIA.
Qualifying for a DSCR Loan Using Estimated Monthly Rents
When calculating DSCR, borrowers will either have a positive net cash flow or a negative net cash flow. If the estimated monthly rent covers the mortgage payment and all the fixed expenses, it is greater than or equal to 1 and has a positive net cash flow. If the estimated monthly rent does not cover the mortgage payment and fixed expenses, it is less than 1 and has a negative net cash flow.
While other lenders won’t qualify borrowers with negative net cash flow, Newfi can accept DSCR loans with both positive and negative net cash flows.
Benefits of a DSCR Loan with Newfi
No Proof of Income or Employment Required
Because DSCR loans qualify borrowers based on the expected market rent of the investment property, we don’t ask for proof of income or employment. That means you don’t need to submit your tax returns, pay stubs, or other debts at all during the loan process.
More Loan Term Options
We offer 30- and 40-Year Interest Only payment options with our DSCR loan. These loan terms can lengthen the repayment period of a borrower’s mortgage, provide interest only payments on the first 10 years of the loan, and therefore their lower monthly payment obligation.
Unlimited Properties Allowed
We know that your borrower’s goal is to grow their real estate portfolio. That’s why we don’t limit the number of properties borrowers can have in their real estate portfolio.
Cash Out Options Available
Our DSCR loans offer Cash Out options for your investor borrowers, so they can use the equity in an existing property and put it into a new investment property.
Refinance Your Vacant Investment Properties
No one wants to live in a renovation zone, so why do some lenders require that your investment property is filled to do a refinance? At Newfi our DSCR loans offer refinancing on vacant investment properties! You can use your cash-out funds from your refinance to complete renovations or use for any other reason.
Does a DSCR Loan Make Sense for Me?
DSCR Loans offer borrowers looking to invest in real estate simple, straightforward solutions. Still, with so many choices available, deciding whether a DSCR loan works for you can feel overwhelming.
If you aren’t sure whether or not a DSCR loan makes sense for you situation, we recommend getting in touch with one of our senior loan advisors who can answer any of your questions! You can get in touch with our team today here: https://app.newfi.com/loancenter/dscr or by calling us at (888) 316-3934.
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