Debt Service Coverage Ratio: 6MO SOFR ARM
No-Income Mortgage Loan

A 6-Month SOFR ARM DSCR loan is a type of non-QM loan for real estate investors. Lenders use a DSCR to help qualify real estate investors for a loan because it can easily determine the borrower’s ability to repay without verifying income.

Secured Overnight Financing Rate (SOFR) is the index that replaced the London Interbank Offered Rate (LIBOR). The SOFR indexed is used to calculate the interest rate on most adjustable-rate mortgages. Index plus margin equals the fully-indexed rate.

For example, the 30-day SOFR average as of 5/11/2022 is .38272. If the bank’s margin is 3.5% the fully-indexed rate would be 3.883%, which is much lower than current fixed rate DSCR mortgages. 

The 6MO SOFR adjusts every six months based on the 30-day SOFR average at the time.

To ensure that your adjustable rate won’t go up like a rocket ship the loan has safety caps in place. The initial adjustment cap is 2% over the start rate, subsequent caps are 1%, and the life cap is 5% over the start rate.

Because real estate investors write off expenses on their properties, some may not qualify for a conventional loan. The debt service coverage ratio loan allows these individuals to qualify more easily because they don’t require proof of income via tax returns or pay stubs that investors either don’t have or that don’t represent their true income due to write-offs and business deductions.

The advantage of the 6-MO SOFR ARM is that the rate and payment start out lower than a fixed-rate mortgage thus giving you more buying power.

The Debt Service Coverage Ratio is a ratio of a property’s annual net operating income and its annual mortgage debt, including principal and interest. Lenders use DSCR to analyze how much of a loan can be supported by the income coming from the property as well as to determine how much income coverage there will be at a specific loan amount.

Many lenders will require a 1.25 DSCR to qualify for a DSCR mortgage loan. However, Griffin Funding allows real estate investors to qualify for a 6-MO SOFR ARM loan with a DSCR as low as .75 so that they can qualify with the cash flow of your property. Please note that interest rates are better on DSCR ratios of 1 or above and that a DSCR ratio of less than 1 requires more reserves.

When considering what a good DSCR ratio is, lenders need to ensure that a borrower is able to pay back the loan.

The debt service coverage ratio formula is the annual gross rental income divided by the debt obligations of the property. Griffin Funding does not take the expenses of management, maintenance, repairs, vacancy, and utilities into account when calculating DSCR.

Please note that Net Operating Income (NOI), Capitalization Rate (Cap Rate), Cash on cash return (COCR), Return on Investment (ROI) are not considered for mortgage loan qualifying purposes.

A real estate investor might be looking at a property with a gross rental income of $50,000 and an annual debt of $40,000. When you divide $50,000 by $40,000, you get a DSCR of 1.25, which means that the property generates 25% more income than what is necessary to repay the loan. This also means that there is a positive cash flow in the lender’s eye.

The DSCR lets the lender know how to determine a borrower’s ability to pay off their DSCR mortgage. Lenders must forecast how much a real estate property can rent for so that they can predict a property’s rental value.

If you have a DSCR of less than 1.0, it means that a property has potential for negative cash flow. DSCR loans can still be made on properties with less than a 1 ratio however they usually are purchase loans with home improvements / upgrades / remodeling to be made to increase the monthly rent or for homes with high equity and potential for higher rents in the future. You also can potentially get the property above a 1.0 ratio with a DSCR interest only loan.

Griffin Funding offers these loans for borrowers with a DSCR as low as .75. If you fall below that requirement, you still have tons of other loan options available to you, including the following Griffin Funding non-QM mortgages:

Begin or continue building your real estate investment portfolio without the need for a private loan. Our 6-Month SOFR ARM DSCR loans are an excellent mortgage option for new and seasoned investors to help you build your portfolio without mortgage challenges standing in your way. Apply for a DSCR loan online today.

Want to learn more about our non-QM loans before applying? Contact us online or call us at (855) 394-8288 to speak to one of our experienced loan specialists.

As of 5/5/22 the principal and interest payment on a $485,000 6-Month SOFR ARM cashout refinance mortgage at an interest rate of 2.99%, a credit score of 720 plus, and 70% loan-to-value (30% down payment) is $2,042.16/mo. No-Income Non-QM DSCR investor loans do not have mortgage insurance premiums and could include a pre-payment penalty. The APR is 4.092% with standard third-party closing costs, $995 Underwriting Fee, $625 Processing Fee, 0% origination, and 3.125% discount points. 30-year amortized home loans require repayment over the course of 360 months. This loan is an Adjustable Rate Mortgage. The interest rate and principal and interest payments are subject to increase after consummation. After the initial period, the interest rate and payment will adjust every 6 months based on the sum of the 30-Day Average SOFR index (at 0.30270% as of 5/5/2022) plus a margin of 3.5% up to a maximum initial cap of 2%, subsequent 6-month caps of 1% and lifetime cap of 5%. Contact a Griffin Funding mortgage professional for eligibility information. Monthly taxes, insurance, and any HOA dues are not included in the monthly payment example above. DSCR loans are only valid for non-owner-occupied investment properties Equal Housing Lender. Income qualification is based on the rental income of the property.