Debt Service Coverage Ratio: No-Income Mortgage Loan
Qualify for a home loan without using your tax returns. 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.
What Is a Debt Service Coverage Loan?
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.
How Does a DSCR Loan Work?
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.
Benefits of DSCR Loans
- 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
- Unlimited cash out
- As little as 20% on down payments
- Minimum credit score required
- 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 cashout loans, 6 months required on all other loans unless the DSCR ratio is less than 1.
What Is the Debt Service Coverage Ratio (DSCR)?
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.
What Is a Good DSCR Ratio?
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 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 12 months of reserves.
When considering what a good DSCR ratio is, lenders need to ensure that a borrower is able to pay back the loan.
DSCR Formula Calculation
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 rental income you can qualify off of 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
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.
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.
Why Does DSCR Matter?
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.
Non-QM Loans for Borrowers with Low DSCR
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.
Apply for Non-QM Investment Property Loan
Begin or continue building your real estate investment portfolio without the need for a 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.
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.
DSCR No-Income Mortgage Loan Rates
The principal and interest payment on a $485,000 6-Month SOFR ARM cashout refinance mortgage at an interest rate of 3.875%, a credit score of 720 plus, and 70% loan-to-value (30% down payment) is $2,280.65/mo. No-Income Non-QM DSCR investor loans do not have mortgage insurance premiums and could include a pre-payment penalty. The APR is 4.657% with standard third-party closing costs, $1,095 Underwriting Fee, $675 Processing Fee, 0% origination, and 2.125% 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 1.70814% as of 8/4/2022) 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. NMLS# 1120111
What Is a 6 Month SOFR DSCR Loan?
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.