What Are DSCR Loans?
A debt service coverage ratio (DSCR) loan is a non-QM loan. These types of loans are designed for individuals who can’t qualify for a conventional mortgage based on the usual requirements such as providing proof of income through W2s—which often bars many investors from the application process. Some other examples of non-QM loans include asset-based loans and recent credit event loans.
DSCR loans are designed for real estate investors who want to acquire more rental properties. That is the explicit purpose of these loans—you can’t use DSCR loans in Montana to purchase an owner-occupied home. This is primarily because your rental income is the major deciding factor in whether or not you’re able to secure Montana DSCR loans.
Who Is a Good Candidate for a Montana DSCR Loan?
As we mentioned previously, DSCR loans in MT are designed for people who want to invest in real estate. More specifically, they’re designed for borrowers who want to invest in rental properties. If you’re purchasing a home that you plan on living in, you can’t do so with DSCR loans.
For borrowers who aren’t able to qualify for a regular loan, DSCR loans are an alternative solution that doesn’t rely on pay stubs or employment verification. There are also certain benefits to DSCR loans, such as quicker closing times, so they’re a desirable solution for real estate investors who are likely to close on a property as soon as possible.
How Does a DSCR Loan Work?
How Does a DSCR Loan Work?
With traditional Montana home loans, you have to submit a wide variety of documents to prove you’re employed, make enough money, have sufficient funds in the bank, and more. For some borrowers, this process makes it virtually impossible to qualify for a mortgage.
Debt service coverage ratio loans in MT work differently because they’re based on your debt service coverage ratio. Your DSCR is essentially how much money you can make by renting a property out versus how much debt you have from that property annually. Lenders look at your DSCR to determine if you’re eligible for a loan, but they also use it to determine your interest rate, down payment, and other aspects of your loan terms.
If a lender determines your DSCR is high enough that you can reliably pay back your loan, you’ll typically get approved. Your rental income will be used to pay expenses related to the properties you’ve invested in. This is why you don’t have to provide the same documentation to get approved for debt service coverage loans in MT.
What Are the Eligibility Requirements for a DSCR Loan in Montana?
As we mentioned before, one of the benefits of DSCR loans is the fact that you don’t have to provide so much documentation. You don’t have to worry about providing proof of income because lenders aren’t making a decision based on your income. The same goes for employment history verification. DSCR loans typically have much more flexible lending criteria than other loans.
One thing you do need to be approved for DSCR loans in Montana is a good DSCR. A DSCR of 1 means your rental income matches the annual debt of the property, so your rental income is enough to pay back your loan. The higher your DSCR is, the better interest rates you’ll get. If your DSCR is too low for this type of loan, you may be eligible for bank statement loans, recent credit event loans, asset-based loans, or interest-only loans.
No matter what state you’re in, DSCR requirements generally work the same. This is why these loans are great for property investors who need a flexible loan or can’t qualify for a traditional loan.
In addition to DSCR, a minimum credit score and down payment are also required.
How Do Lenders Calculate DSCR?
Considering how important your DSCR is, you should know how it’s calculated. Lenders use a specific formula to calculate your DSCR:
Debt service coverage ratio (DSCR) = Rental income ÷ annual debt
At Griffin Funding, we use lease agreements and an appraisal from a professional to determine your rental income. Then, we calculate your annual debt by figuring out how much you pay in principal, interest, taxes, insurance and, HOA fees (if you pay them) each year. We then divide rental income by annual debt to calculate your DSCR.
What Is a Good DSCR for a Rental Property?
Lenders require a specific DSCR in order to secure a loan to invest in rental property. For most lenders, you need to have a DSCR of at least 1.25 to get a loan. Furthermore, you typically need to have an even higher DSCR to get a low-interest loan with these lenders.
When applying for a DSCR loan in Montana through Griffin Funding, you can typically qualify with a DSCR as low as 0.75. Keep in mind that interest rates and other loan terms will change if your DSCR is higher than that, but 0.75 is our minimum.
Advantages of a Montana DSCR Loan
Advantages of a Montana DSCR Loan
DSCR loans are a smart way for property investors to secure funding because they rely solely on rental income versus property debt. Here are some of the biggest advantages of securing a Montana DSCR loan:
- No proof of income or employment verification required
- Down payments as low as 20%
- Loans up to $5,000,000
- Competitive interest rates
- Interest-only loans are also available
- Works for both new and experienced investors
- Closing times may be quicker
- Cashout refinance options
- You can invest in short-term (VRBO, Airbnb, etc.) or long-term rentals
With a loan specifically designed for property investors, you’ll likely set yourself up in the best position to continue expanding your portfolio.
Where We Lend
Ready to apply for a DSCR loan in Montana? We serve the following cities and surrounding areas
- Four Corners
- East Helena
Get in touch with us today, we look forward to assisting you with your DSCR loan.
Find Out If You Qualify for a DSCR Loan Today
Montana debt service coverage ratio loans can be a great way to get started in real estate investing or secure your next rental property. At Griffin Funding, we have a variety of loan options available, even if you don’t have the best DSCR. Plus we’ll walk you through the entire process to make it as simple as possible. To learn more about our Montana DSCR loans or to get the loan process started, call Griffin Funding at (855) 394-8288. You can also apply online to find out if you’re eligible for a DSCR loan in Montana.