What Is a DSCR Loan?

Traditional Arizona home loans require you to submit tax returns and pay stubs and go through a complicated application process. Debt service coverage ratio (DSCR) loans are a type of non-QM loan that allows investors to skip some of the hassles of investing in real estate. The QM in non-QM stands for “qualifying mortgage.” A qualifying mortgage is a lending process that involves examining your assets, your current employment status, your debt-to-income ratio, your credit history, and more.

Investors who aren’t able to qualify for a traditional mortgage may choose a non-QM DSCR loan to save time and make it easier to invest. Asset-based loans like this allow investors to secure a loan based on the rental income of a property and the debt obligations. 

If you want to invest in real estate but can’t qualify for a conventional mortgage, DSCR loans in AZ are an alternative to consider that can help you expand your investment portfolio faster.


How Does an Arizona DSCR Loan Work?

How Does an Arizona DSCR Loan Work?

If you’re considering applying for a DSCR loan in Arizona, you probably have a few questions about how they work. DSCR loans are used to invest in real estate and are a smart option for people who can’t qualify for a regular mortgage or who don’t want to go through the full documentation loan process.

Unlike traditional mortgage loans, debt service coverage ratio loans in Arizona compare the annual rental income of a property to the annual debt obligations of the property. This number is referred to as your DSCR, and it’s what lenders use to determine if you’re eligible for a loan.

Keep in mind that DSCR loans essentially work the same way in every state. Typically, the only thing that changes from state to state is the cost of a property and the average rental value of a property.


How Is DSCR Calculated?

To see if you qualify for a DSCR loan, lenders will look at your debt service coverage ratio (DSCR). DSCR is your annual gross rental income divided by your property’s debt obligations. Here’s how it works:

  1. First, we calculate your gross rental income using your lease agreement and an appraiser’s estimate of your rental rate. The lower of the two values is used as your rental income. If you have 12 months of rental income that you can prove, you can use that instead of the appraiser’s rent schedule.
  2. Next, we’ll look at your annual debt, which includes principal, interest, taxes, insurance, and HOA payments if you make them.
  3. Finally, we’ll divide your gross rental income by your annual debt to figure out your ratio. This ratio will be used to determine if you’re eligible for non-QM loans.

What Is a Good DSCR Ratio?

Typically, a good DSCR ratio is one that’s above 1.0, which means you’re generating positive income compared to your debt obligations. However, Griffin Funding allows real estate investors to apply for DSCR loans in Arizona with a DSCR ratio of 0.75 or higher. Keep in mind that a higher DSCR ratio will typically result in a lower interest rate, but that doesn’t mean you need an exceptionally high DSCR ratio to invest.

Keep in mind that each lender sets their own standards for their DSCR requirements and how that correlates to loan terms. 

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What Do DSCR Lenders Look for?

As mentioned, the most important factor DSCR lenders look at is your rental income to property debt obligation ratio. However, there are other requirements you must meet to be approved for a DSCR loan.

For example, at Griffin Funding, if you have a DSCR ratio of less than 1.0, you’ll also need 12 months of reserves to qualify for a loan. Reserves are assets you have immediate access to—cash being the most common—that you can use to pay your mortgage in case of emergency. Reserves are calculated after you’ve made a down payment and paid closing costs. Minimum credit scores are required.

Who Is a DSCR Loan Best Suited for?

A debt service coverage ratio loan in AZ is best suited for real estate investors. Real estate investing is all about acquiring multiple properties to increase rental income, for which most investors need loans. DSCR loans allow you to apply for home loans based on your rental income rather than your individual personal income.

If you’re self-employed and don’t have W-2s and pay stubs—and don’t plan on investing in multiple properties— bank statement loans may be a better option for you.

Arizona DSCR Loan Highlights

Arizona DSCR Loan Highlights

It can be difficult to determine whether or not DSCR loans in Arizona are right for you. Here are some of the key takeaways about DSCR loans that can help you make an informed decision when you apply for one of our loans:

  • DSCR loans typically require a DSCR ratio of at least 1.0 or 1.25 (depending on where you’re applying), but Griffin Funding offers loans for ratios as low as 0.75.
  • These loans are best for real estate investors who can’t qualify for a mortgage for multiple properties.
  • DSCR loans are only valid for non-owner-occupied investment properties.
  • The APR is typically slightly higher on DSCR loans.

If you still have questions about Arizona DSCR loans, speak with one of our knowledgeable specialists today who can help you find the best loan solution for you.

Other Loan Options for Borrowers with Low DSCR

If you have a low DSCR, there may be some other loan options for you to consider:

  • Asset-based loans: Asset-based loans use assets as income to secure a mortgage. These loans are often used by owners of small- and medium-sized businesses.
  • Bank statement loans: A bank statement loan allows you to apply for a mortgage using only bank statements, rather than tax returns and W-2s.
  • Recent credit event loans: If your credit score dropped due to a recent event such as bankruptcy or foreclosure, you still may be able to secure a mortgage with one of these loans.
Where We Lend

Ready to apply for a DSCR loan in Arizona? Griffin Funding services the following areas and more:

  • Phoenix
  • Tucson
  • Mesa
  • Chandler
  • Glendale
  • Scottsdale
  • Gilbert
  • Peoria
  • Tempe
  • Surprise

Apply for a DSCR Loan in Arizona

DSCR loans provide a great opportunity for real estate investors to get the funding they need to invest in more properties and grow their portfolio. At Griffin Funding, we have a simple DSCR loan process that can help you make your next real estate investment even if your DSCR is a bit low. To find out more, apply for a DSCR loan with Griffin Funding or call (855) 394-8288 to learn more about our mortgage programs.