What Are DSCR Loans?

DSCR stands for debt service coverage ratio, which is a term that’s used to describe the amount of cash flow you have versus the debt you have to pay. In the case of DSCR loans in Tennessee for rental properties, this refers to your rental income compared to the annual debt for that rental property.

These loans are considered non-QM loans, which means they have more flexible underwriting terms than conventional loans. Most traditional Tennesee home loans require you to submit extensive documentation, including proof of income, employment history verification, and more. With Tennessee debt service coverage ratio loans, you don’t have to submit that information because lenders don’t use it to qualify you for a loan.

What Types of Borrowers Should Consider Tennessee DSCR Loans?

While some non-QM loans are a great solution for homebuyers who can’t seem to secure a conventional mortgage loan, that’s not quite what DSCR loans are for. DSCR loans in Tennessee are exclusively designed for property investors who need capital to purchase rental properties. In fact, you can’t use DSCR loans to invest in owner-occupied properties, so you can’t live in the home you purchase with your DSCR loan. However, there are other types of non-QM loans you can use to purchase a home you can live in, such as recent credit event loans.

If you fall into the former category, you should also know that, not only do these loans cater to the needs of property investors, but they also offer several benefits over traditional loans.

Where Are Griffin Funding DSCR Loans Available?

Where Are Griffin Funding DSCR Loans Available?

Griffin Funding is proud to offer DSCR loans for investors across the state of Tennessee, including the following areas:

  • Nashville
  • Memphis
  • Bartlet
  • Johnson City
  • Knoxville
  • Franklin
  • Jackson
  • Chattanooga
  • Clarksville
  • Murfreesboro

Don’t see your city? Reach out to find out if we serve your area.

How Is DSCR Calculated?

Before you’re approved for a loan, your lender will need to make sure your DSCR is high enough that you can be relied on to make loan payments on time. Your DSCR represents the ratio between your rental income and the annual debt for a rental property. The formula for DSCR is:

Debt service coverage ratio (DSCR) = Rental income ÷ annual debt

Here’s how we calculate your DSCR at Griffin Funding:

  1. To start, we figure out your rental rate by looking at lease agreements and getting an appraisal from a licensed appraiser. We pick the lower of the two numbers to use as your rental rate. You can also show us 12 months of rental income history instead of having an appraisal done.
  2. Next, we look at your bills as a property owner. We combine your payments on the principal, interest, taxes, insurance, and any HOA fees you may owe. This is your total annual debt.
  3. The final step is dividing your rental income by your total annual debt to calculate your DSCR.

For example, let’s say we estimate your rental income to be $50,000 and your annual debt to be $40,000. When you divide 50,000 by 40,000, you get 1.25. This is your DSCR, and it means your rental income is higher than your debts, so you should be able to make loan payments on time.

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What Are the Eligibility Requirements for a DSCR Loan in Tennessee?

In order to be eligible for DSCR loans in Tennessee, you’ll have to meet certain requirements. DSCR loans in TN tend to have more flexible lending criteria than other types of loans, but the main criteria you need to meet is a good DSCR. Lenders will look at your DSCR to determine whether you’re a fairly low-risk borrower that they can expect to get their money back from.

You don’t have to provide proof of income or employment history verification when you apply for DSCR loans in Tennessee. Since your loan is based on the ability of your rental income to cover your total annual debt, that’s what lenders will focus on. A minimum credit score and down payment is also required.

What DSCR Do Lenders Look for?

When you apply for a loan, different lenders will require varying DSCRs. To secure a DSCR with most lenders, you’ll need to have a DSCR of 1.25 as shown in the example above.

Fortunately, Griffin Funding offers DSCR loans in Tennessee for borrowers with a DSCR as low as 0.75. This gives you a lot more flexibility and allows us to offer loans to more investors.

Even if your DSCR isn’t high enough to be eligible for a DSCR loan, there are other non-QM loans you may be able to apply for, such as:

  • Asset-based loans: Asset-based loans are secured based on available assets instead of income, which includes things like accounts receivable and inventory.
  • Bank statement loans: With a bank statement loan, several months of bank statements are used to prove your income and qualify for a loan.
  • Interest-only loans: Interest-only loans allow you to pay strictly toward interest for a set number of years—determined by your lender. After that, your payments change and begin counting toward the principal.

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Tennessee DSCR Loan Benefits

You might want to apply for DSCR loans in TN because you’re not eligible for other types of loans. However, there are also many benefits of opting for DSCR loans when it comes to property investing.

DSCR loans offer competitive rates, plus you can qualify for a loan with a reasonable down payment. Closing times may be quicker, and you can invest in either short-term Airbnb rentals or long-term rental properties. If you’re planning on investing in rental properties, DSCR loans are an advantageous option to consider.

Start the DSCR Loan Process Today

If you want to expand into investing in more properties, the first step is securing funding. With a DSCR loan in Tennessee, you invest in a property without providing proof of income and jumping through unnecessary hoops. Plus, with Griffin Funding, you gain access to competitive interest rates and knowledgeable loan specialists who can help you find the best solution for your circumstances. To learn more about debt service coverage ratio in TN or apply for a loan, complete our online application or call Griffin Funding at (855) 394-8288.