What Is a DSCR Loan?
A DSCR loan is a type of Non-QM loan that is designed specifically for real estate investors to buy properties. Since most real estate investors don’t receive pay stubs or tax returns, getting a home loan can be difficult—unless you use a DSCR loan.
With a traditional home loan, you’re required to show pay stubs, W-2s, and tax returns in order to verify your income, but a DSCR loan is based on your property’s cash flow. Instead of reviewing tax documents, a lender will calculate your debt service coverage ratio (DSCR) to see if you have a steady cash flow. This ratio indicates how much rental income you have compared to the annual debt you incur by purchasing rental properties.
There are many benefits of using DSCR loans in CT to buy rental properties, such as:
- No income verification needed
- No limit on the number of properties you can have
- Can make down payments as low as 20%
- Get unlimited cash out
- Can get loan amounts up to $5,000,000
- Closing times can be shorter
- Ideal for new and experienced real estate investors
- Interest-only loan option available
- Can be used for both long-term and short-term (Airbnb) rental properties
How Is DSCR Calculated?
DSCR is calculated by dividing the annual gross rental income by the debt obligations of the property. The formula for DSCR looks like:
Annual gross rental income / annual debt obligations = debt service credit ratio
Your rental income is calculated using the lease agreements and rent schedule of a licensed appraisal. The lesser of those two numbers will be used as your rental income. Your annual debt obligations is the total amount of money you pay each year in principal, interest, taxes, insurance, and HOA fees, if applicable. Once you have those two numbers figured out, you’ll then divide your rental income by your annual debt to get your debt service credit ratio.
For example, if a property’s gross rental income is $60,000 and the annual debt is $30,000, that means the DSCR is 2. This is an ideal DSCR and proves to a potential lender that you have a solid enough cash flow to qualify for the loan. With a high DSCR, you’ll typically have a better chance of securing a loan with great terms.
What Is a Good DSCR Ratio?
A good DSCR ratio varies depending on several factors, like the location of the property, but for the most part, lenders look for a DSCR above 1.25. However, at Griffin Funding, we can help you get a DSCR loan in Connecticut with a DSCR score as low as 0.75.
A higher DSCR indicates that you’re more likely to make your monthly mortgage payment and shows a lender that you have a consistent cash flow. There are many benefits of having a good DSCR, such as lower down payments and interest rates.
If your DSCR loan is below 0.75, that doesn’t necessarily mean you have no options when it comes to buying properties. Griffin Funding offers a variety of other types of home loans, such as recent credit event loans and asset-based loans, which might be better suited for you.
With a recent credit event loan, borrowers can qualify for a loan despite recent credit events like bankruptcy or foreclosure. With an asset-based loan, borrowers can qualify for a loan using their assets instead of their income. Both of these can be good options for prospective homeowners who might not be able to qualify for a conventional loan.
Who Is a DSCR Loan Best Suited for?
A DSCR loan is best suited for real estate investors who are looking to invest in rental properties. DSCR loans are designed specifically for real estate property investors and can’t be used to buy owner-occupied properties.
What Do DSCR Lenders Look for?
Each lender will have their own requirements for what they look at for a DSCR loan, but the requirements will typically include:
- Strong DSCR
- Down payment of at least 20%
- Certain documentation
- A minimum credit score
What Are the Requirements for a DSCR Loan in Connecticut?
The requirements for a CT DSCR loan differ depending on the lender that you use. If you use Griffin Funding, you must have a DSCR of at least 0.75. However, if you have a higher DSCR, you’ll typically get more favorable terms with your mortgage loan. For example, a DSCR of 0.75 will require 12 months of reserves, but a DSCR above 1 will require 6 months of reserves. In some cases, Griffin Funding will consider DSCR ratios below .75 on an exception basis. A minimum down payment of 20% and a minimum credit score are required.
Areas We Serve
Wherever you live in Connecticut, we’re here to help you secure a DSCR loan that you’re happy with. We serve various cities throughout CT, so we can provide prospective homeowners with favorable interest rates and loan terms no matter where they live. The areas in Connecticut that we serve include:
- New Haven
Apply for a DSCR Loan in Connecticut
If you’re a real estate investor who’s interested in buying properties in CT, DSCR rental property loans in Connecticut are worth considering. With a DSCR loan in Connecticut, you can purchase as many rental properties as you want without having to show proof of income. You just need to have a high enough DSCR.
To learn more about DSCR loans in Connecticut, or if you want to apply for one, check out Griffin Funding today. Griffin Funding is the best option for mortgage lenders, as we’ll work with you to find a mortgage loan that has low-interest rates and favorable terms. Just fill out our online application today and you can start your real estate investment journey before you know it.