Debt Service Coverage Ratio: No-Income Mortgage Loan
Qualify for a home loan without using your tax returns with a DSCR loan program. As a real estate investor, you can avoid high rates and high points of private loans, lengthy approval processes, and strict lending criteria with a debt service coverage ratio loan, which is a type of no-income loan. Qualify for a loan based on your property’s cash flow, not your income.
Securing a debt service coverage ratio loan can help you expand your investment portfolio easier than ever before. Read on to learn more about what a DSCR loan is, how it works, and DSCR loan requirements.
- What Is the Debt Service Coverage Ratio (DSCR)?
- What Is a DSCR Loan?
- How Does a DSCR Loan Work?
- Benefits of DSCR Loans
- What Is a Good DSCR Ratio?
- DSCR Formula Calculation
- Example of Debt Service Coverage Ratio Calculation
- Why Does DSCR Matter?
- How to Apply for a DSCR Loan
- Non-QM Loans for Borrowers with Low DSCR
- Apply for Non-QM Investment Property Loan
- DSCR No-Income Mortgage Loan Rates
- What Is a 6 Month SOFR DSCR Loan?
- Frequently Asked Questions
The debt service coverage ratio is a ratio of a property’s annual gross rental income and its annual mortgage debt, including principal, interest, taxes, insurance, and HOA (if applicable). 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. Lenders do not take into account expenses such as management, maintenance, utilities, vacancy rate, or repairs in the debt-service-coverage ratio calculation.
A 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.
A DSCR loan is one of several types of home loans referred to as Non-QM loans. Non-QM loans provide potential borrowers with an alternative route to financing, which doesn’t require traditional income verification methods. A DSCR loan in particular makes it easier to show rental income that might not show up on your taxes due to deductions for legitimate business expenses.
A DSCR loan enables real estate investors to get a loan because it takes into account cash flow from investment properties rather than pay stubs or W-2s, which many investors do not typically have. Lenders use DSCR to evaluate a borrower’s ability to make monthly loan payments.
Deductions from properties may lower taxable income, making it hard for investors to prove their true income. Lenders use DSCR to determine whether someone can make loan repayments. Otherwise, many investors might struggle to meet the basic eligibility standards for real estate loans.
Since they don’t require pay stubs or tax returns showing minimum income levels, debt service coverage ratio loans are a great alternative for investors who claim many write-offs and business deductions.
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.
Real estate investors looking for home buying tips should consider a DSCR loan because it’s ideal for properties you intend to rent out or otherwise turn into income-generating properties. From renting to a long-term tenant or operating a short-term rental business on Airbnb, there are many situations where a DSCR loan is a good option, especially if you don’t have W-2 income.
Some of the property types you can use a DSCR loan for include:
- Single Family Residences (SFR), including single family homes, condos, and townhomes.
- Multifamily properties (1-4 Units).
Many real estate investors tend to use DSCR loans for rental income properties that allow them to open up new revenue streams. If you’re interested in purchasing or building a property and unsure about whether you can use a DSCR loan to do so, reach out to Griffin Funding. We can help you decide whether a DSCR loan is right for you.
- Potentially quicker closing times
- No income or job history verification required
- No limit on the number of properties
- Loan amounts up to $5,000,000 (Minimum loan amount: $100,000)
- Unlimited cash out
- As little as 20% on down payments
- Credit scores as low as 620
- Cashout Refinance up to 75% LTV
- DSCRs as low as .75% (Under .75 DSCR can be considered on an exception)
- Interest-only loan option available
- Suited for new and seasoned real estate investors
- Both long-term and short-term rentals are eligible (Airbnb, VRBO, etc.)
- No reserves required on cash-out loans, 6 months required on all other loans unless the DSCR ratio is less than 1
- DSCR LLC loans: Close in the name of your LLC
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 loan with a DSCR as low as .75 so that they can qualify with the cash flow of their 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 12 months of reserves. Real estate investors can increase the DSCR by choosing an interest-only loan and/or a 40yr term to maximize cash flow.
When considering what a good DSCR ratio is, lenders need to ensure that a borrower is able to pay back the loan.
On an exception basis with a larger downpayment Griffin Funding will consider a DSCR below .75.
Negative Cash Flow DSCR Loans
Negative cashflow DSCR loans, also known as no ratio DSCR loans, are riskier and, therefore, come with stricter underwriting standards and higher down payments.
- Minimum loan amount: $150,000 ($3,000,000 maximum)
- Minimum down payment: 25% up to $1,000,000 (add 5% for Short Term Rentals)
- Minimum down payment: 40% up to $3,000,000 (add 5% for Short Term Rentals)
- Minimum credit score: 700 FICO
What are the reasons that you should consider acquiring a negative cash flow property using a no ratio DSCR loan?
- There is an appraisal gap on the comparable rents. There are not enough rental comps to accurately show the true rental income issued by the appraiser and you are confident that the actual rent is higher.
- You intend to carry out renovations to the property once it is acquired. These improvements will not only enhance the value of the property but also allow you to increase the rents. Consequently, this will result in a cash flow positive position for you.
You are currently renting out your investment property below market with a lot of tappable equity and want to do a cash-out refinance to rehab the property to increase rents and/or acquire another property that will help offset the negative cash flow.
You are purchasing a property that utilizes ADU income on an unpermitted ADU (which the lender can’t use for rental income qualification).
You are purchasing a property intending to build an ADU or multiple ADUs on it that will create positive cash flow.
In the current market particularly, the allure to engage in an equity play is high, speculating on a 20-30% price increase should interest rates fall, with the aim of achieving quick financial gains. Many investors are willing to endure short-term losses on rents, banking on substantial appreciation in the coming years. However, most experts assert that, while investing in real estate, it is crucial not to lose focus on the fundamentals. They maintain that any appreciation should be regarded as a bonus, not a given certainty.
Another more precarious rationale involves situations where the property does not generate positive cash flow at the prevailing Debt Service Coverage Ratio (DSCR) interest rates; however, it could potentially do so if interest rates decline in the future, coupled with the average annual rent growth. The strategy here is to acquire the property now and opt for rate/term refinancing later, or sell if values escalate sufficiently. Relying on a decrease in interest rates is generally not advisable as interest rates are, to a large extent, beyond one’s control. Investment properties should either be generating cash flow presently or have a robust plan in place to ensure positive cash flow in the future.
Avoid purchasing a property with negative cash flow if you lack a strategic plan to enhance rents. The team at Griffin Funding can review historical appreciation in your market; if it reveals an area with sluggish growth and minimal pent-up buying demand, you might not realize quick profits even when the market shifts. If the property doesn’t generate positive cash flow with your loan calculated at the prevailing DSCR rates, and there is no avenue to raise rents, it may not yield positive cash flow for a prolonged period, potentially becoming a financial drain. Overpaying or investing in unfruitful ventures is something everyone wants to steer clear off.
The debt service coverage ratio formula is the annual gross rental income divided by the debt obligations of the property.
- To find your gross rental income, we take your annual rental income based on your lease agreement and the appraiser’s comparable rent schedule (form 1007) and use the lesser of the two. In some cases, if you can prove a twelve-month history of LTR or STR rental income, you can qualify off that rather than the appraiser’s market rent.
- Next, you’ll need to find your annual debt. Your annual debt for loan qualification purposes equals the total annual principal, interest, taxes, insurance, and HOA (if applicable) payments. Annual Debt = Total Annual PITI payments.
- Next, you’ll divide your annual gross rental income by your annual debt for your ratio. DSCR = Annual gross rental income/Annual Debt.
Example of Debt Service Coverage Ratio Calculation
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 debt service coverage ratio 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 the 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, or 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.
You need to find a bank with a robust DSCR loan program. Griffin Lending offers DSCR loans and has a history of qualifying borrowers at various income levels for small and large investment property loans.
Here’s an overview of how to apply for a DSCR loan with Griffin Funding:
- Fill out a loan application: Once you’ve chosen a reputable lender, it’s time to fill out a loan application. You can quickly apply for a DSCR loan through Griffin Funding using our online application.
- Calculate your DSCR: Calculate the DSCR and fill out a rent schedule. The rent schedule validates the property’s fair market value, showing whether you can cover additional mortgage payments on a new property. Your DSCR will impact the interest rate that you qualify for.
- Lock in your interest rate: After calculating your DSCR and reviewing your application, we will offer you an interest rate for your loan. You can lock in this interest rate as we proceed through the final steps of the loan approval process.
- Get approved: Close the loan. You don’t need to bring proof of personal income or other information about your financial history. DSCR loan requirements are less stringent than traditional loans, making the closing go much faster.
- Loan is funded: Once the loan is approved, we will quickly fund it and deposit the loan amount into your account.
Upon approval for our DSCR loan program, you’ll receive an estimate of the interest rate, closing costs, and monthly mortgage payments. Prepare to pay for an appraisal and undergo the underwriting process prior to signing the closing documents. The underwriting process includes pre-approval, rental income verification, title search, and a final underwriting decision.
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:
- Asset-Based Loans: Asset-based mortgages are another loan product for investors who want to qualify for a loan without taking income into account. These loans allow you to use your assets instead of your income to qualify, which means you won’t have to provide a tax return or proof of income..
- Bank Statement Loans: A bank statement loan allows investors to verify their income using bank statements instead of tax returns. These are beneficial for investors who have write-offs and deductions on their taxes that may make lenders believe that they bring in less money than they actually do each month.
- Interest-Only Loans: Interest-only loans offer investors the option to pay lower monthly payments for the first portion of the loan. During this time, payments only apply to interest, not the principal balance.
- Recent Credit Event Loans: A recent credit event loan allows borrowers to qualify for a loan despite recent credit events like bankruptcy, short sale, foreclosure, and divorce so that you can start rebuilding your investment portfolio as soon as possible.
- Near Miss Jumbo Loans: Near miss jumbo loans offer flexible qualification requirements and allow individuals to borrow large sums with as little as 10% down.
Begin or continue building your real estate investment portfolio without the need for a hard money private loan. Our 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. Whether you are a first-time investor or an experienced investor investing in a long-term rental property or a short-term vacation rental our DSCR loans have you covered.
As mentioned above, DSCR loans are a type of mortgage used by real estate investors to purchase property without having to show proof of income. The loans are made by looking at the potential income that a property could bring, instead of the income that an investor is making right now. 6 month SOFR DSCR loans are a variation on this financing option where the loan is packaged as an adjustable rate mortgage with an interest rate that changes based on the SOFR index.
The Secured Overnight Financing Rate is an index that provides a weighted average of the interest rates that major financial institutions charge for overnight loans. A 6-month SOFR DSCR loan has an adjustable rate that changes based on the SOFR index. With a SOFR mortgage, a real estate investor starts with a fixed interest rate that stays the same for a period of time and then adjusts every six months based on the 30-day average of the SOFR index.
A 6 month SOFR DSCR loan allows an investor to take advantage of market rates. As soon as the SOFR rate falls, an investor can see the interest rate on their mortgage fall. On the other hand, if the SOFR rate rises, borrowers will be subject to a higher interest rate.
At Griffin Funding, we offer 6 month SOFR ARMs , 3/6 SOFR ARMs—meaning you get a fixed rate for 3 years and then the interest rate adjusts every 6 months—5/6 SOFR ARMS, 7/6 SOFR ARMS, and 10/6 SOFR ARMS. As you can see, we have a wide variety of SOFR DSCR loans available to potential borrowers who are interested in this financing option.
If you are looking to build a portfolio of properties to list on VRBO or Airbnb you’ll want to finance them using a STR DSCR loan. To qualify for a DSCR loan on a short-term rental (STR) property, you’ll need to prove through AirDNA comparables that your DSCR will be 1.25% or more. The following applies to purchasing new STR properties:
- 700 Minimum Credit Score
- 1% Minimum DSCR
- 25% Minimum Down Payment (for borrowers with 1-year of experience operating STRs)
- 30% Minimum Down Payment (for borrowers with less than 1-year of experience operating STRs)
- Projected Annual Revenue divided by 12 months
- Occupancy Rate >50%
If you want to refinance your STR with a DSCR loan to lower your interest rate or get cashout of your property, you’ll need to produce a stable history of short-term rental income in order to qualify for a STR DSCR cashout loan.
Leveraging DSCR loans for Airbnb and other short-term rentals can have a property multiplier effect – turn 1 property into 8 properties within 8 years or 18 properties within 12 years.
Is a DSCR loan a hard money loan?
DSCR loans differ from hard money loans in several ways. DSCR loans tend to have lower down payment requirements and interest rates and are available at some local lenders, including Griffin Funding. Additionally, the loan terms are usually more favorable, which is a bonus if you need a longer loan term. Overall, DSCR loans tend to make a more attractive alternative to hard money loans for real estate investors.
What credit score is needed to get a DSCR loan?
DSCR loans do require decent credit scores. However, you can get a debt service coverage ratio loan with a score of 620 and above. Naturally, the higher your credit score, the better your interest rate and loan terms are likely to be.
What type of property can I purchase with a DSCR loan?
The DSCR loan makes it possible to buy income properties for either short-term or long-term rentals. You can even purchase a secondary residence if you can prove it will generate sufficient income.
For example, you can maximize rental income on a permanent residence through seasonal rentals and short-term stays. Listing the property on Airbnb, renting out rooms to long-term tenants, or renting out portions of the property for events are all ways to generate income to meet your debt service requirement.
What is the minimum down payment on a DSCR loan?
It is possible to get a DSCR loan with as low as a 20% down payment. However, if you want to minimize your total interest payments, consider making a higher down payment, resulting in a lower monthly payment.
What is the minimum loan amount on a DSCR loan?
The minimum loan amount for a DSCR loan starts at $100,000.
What are the risks of a DSCR loan?
While DSCR loans have several benefits, there are also a few drawbacks to this loan type. Some risks associated with DSCR loans include:
- Higher down payment than a conventional loan
- Higher interest rates and fees
- Available for investment properties only
- Need to maintain property to minimum standards regardless of income generation
Where is the best place to get a DSCR loan?
Not all financial institutions offer debt service coverage ratio loans. However, you can get a DSCR loan at numerous banks, private lenders, and credit unions. These lenders offer DSCR loans to buy investment homes and properties, construct new properties, or renovate properties you already own.
Griffin Funding is a top provider of DSCR loans with competitive terms and rates. We will take the time to get to know you during the discovery meeting and our specialists will help you during every step of the application and approval process.
Why does a DSCR change over time?
The DSCR measures your ability to repay a mortgage loan at a given point in time. A higher ratio indicates more cash flow and suggests a higher likelihood to repay a new mortgage loan. However, if you take on new debt or the rental income on your existing properties increases or decreases it can change your debt service coverage ratio for the better or worse.
As your real estate portfolio grows, you will have higher or lower cash flow at various times. This makes it important to time your application for a DSCR loan wisely.
Interest rates will also affect your ability to repay a new loan. Higher interest rates increase monthly expenses and lower DSCR. Alternatively, lower interest rates can increase the DSCR.
Who is the DSCR loan perfect for?
You can use a DSCR loan if you don’t have proof of income via traditional documentation such as W-2s, pay stubs, and tax returns. If you’re looking to buy and flip houses, this might be the right lending choice for you. Additionally, investors who buy and hold rental properties often use DSCR loans to obtain funding for new investments.
How can I find out more about DSCR loan requirements at Griffin Funding?
Make an appointment with one of our loan specialists today to discuss any questions you may have regarding our DSCR loan program or any of our other loan types, such as VA loans or bank statement loans. We’ll do everything we can to smooth the way and help you gather the necessary information to apply for a debt service coverage ratio loan. You can either call us at 855-698-1098 or reach out to our team via our website for more information about DSCR loans and Non-QM loans in general.