What Is a DSCR Loan?

A DSCR loan, or Debt Service Coverage Ratio loan is a Non-QM loan that helps real estate investors qualify for a loan. Lenders use the DSCR to determine if the investor can repay the loan without having to verify income. This loan also helps the investor qualify without tax returns, long approvals, high points, and high rates.

Additional benefits of having a DSCR loan include:

  • No limits on the quantity
  • High loan amounts up to $5,000,000
  • Down payments as low as 20%
  • Unlimited cash-out
  • Long-term and short-term (Airbnb, VRBO, etc.) rentals qualify

How Is DSCR Calculated?

Lenders calculate DSCR by taking the annual gross rental income of the investor and dividing it by the debt obligations of the property (annual gross rental income/annual debt). Here’s a quick breakdown:

  • The gross rental income is based on the lesser amount of annual rental income of your lease agreement and the comparable rent schedule from the appraiser unless a 12-month history of rental income can be presented.
  • The annual debt is based on the total annual principal, interest, taxes, and insurance. If there is an HOA, this amount is included.

Investors may wonder about the capitalization rate (cap rate), net operating income (NOI), return on investment (ROI), and cash on cash return (COCR). These are not included in the qualifying process for a DSCR mortgage loan.

What Is a Good DSCR Ratio?

The DSCR is key in these types of loans because it assists investors and analysts in determining the strength of an investor’s finances. While the variables on ratios change, DSCRs above 1.25 are considered good.

Investors with a ratio below 1.00 may be deemed a risk. Griffin Funding looks beyond the numbers, allowing real estate investors with DSCRs as low as .75 to qualify for loans with the cash flow of the property. Lower ratios have higher interest rates and usually require 12 months of reserves.

Griffin Funding has a variety of loans available to assist real estate investors with a low DSCR. These Non-QM mortgage options may help:

  • Interest-only loans
    These loans are structured so the monthly payments are lower for the first portion of the loan and only apply to interest, not principal.
  • Asset-based loans
    These loans allow real estate investors to use assets in lieu of income to qualify. This makes it a lot easier for some as it circumvents the need for tax returns or proof of income.
  • Bank statement loans
    These loans let lenders verify their income with bank statements instead of using their tax returns. This is advantageous for those investors who may have items that may make it seem as if they bring in less money than they do. These include tax deductions and write-offs.
  • Recent credit event loans
    Recent credit events such as short sales, foreclosures, divorces, and bankruptcy often hinder real estate investors looking for a loan. This type of loan takes those events into account, allowing borrowers to qualify and rebuild their portfolios.

What Do DSCR Lenders Look for?

DSCR loan lenders look for individuals who believe they will not qualify for a QM loan based on their income, credit score, or recent events. They look at the DSCR to determine whether the borrower meets the qualifications. For borrowers who do not qualify for a DSCR loan, there are other alternatives, such as an asset-based loan or a bank statement loan.

At Griffin Funding, these qualifications may include a ratio as low as .75. If the DSCR is above 1.25, lower interest rates and beneficial loan terms apply.

Who Is a DSCR Loan Best Suited for?

DSCR loans in Illinois are best suited for real estate investors, self-employed individuals, small to midsize business owners, those with recent disruptive credit events such as bankruptcies, foreclosures, or short sales, and borrowers looking for interest-only payments or flexibility in the approval requirements.

How Does an Illinois DSCR Loan Work?

This type of loan allows real estate investors to qualify based on the income and cash flow of a rental property instead of their personal income. They must go through a verification process that is different from a traditional loan. The type of loan they qualify for is based on the recommendation of the lender, the DSCR ratio, and what can be proven income-wise.

Areas We Serve

Griffin Funding provides service all across Illinois, in areas including:

  • The Greater Chicagoland area
  • Evanston
  • Naperville
  • Rockford
  • Elgin
  • Champaign
  • Clarendon Hills
  • Aurora
  • Joliet
  • Springfield
  • Peoria
  • Waukegan

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What Are the Requirements for a DSCR Loan in Illinois?

Your DSCR ratio is one of the factors that determines eligibility for a DSCR loan in Illinois. To qualify for this loan, a minimum down payment and a minimum credit score are also needed. Additionally, owner-occupied properties cannot be purchased with this type of loan. Griffin Funding qualifies real estate investors with a DSCR as low as .75.

For those who cannot qualify with an acceptable DSCR ratio, there are additional options such as a recent credit event loan, which can provide financing even if there was a bankruptcy, foreclosure, or short sale. Another option is an interest-only loan, where the payments are made for a certain period on the interest at the beginning of the loan. The mortgage payment is then recalculated to begin paying off the principal. Griffin Funding has interest-only loans on 30-year or 40-year fixed rates as well as 6-month ARMs.

Apply for a DSCR Loan in Illinois

As an investor, partnering with the right funding source can make a difference. The team at Griffin Funding is the best DSCR loans option in Illinois for mortgage lenders that can help you obtain what you need without too much red tape.

Are you ready to get started? Complete an online application to get the process started and speak with one of our loan specialists today!