Rental properties are one way of making money in real estate. Rentals may bring you income, but managing them can be an expensive and time-consuming task. For those who find the income from a rental worth the work they’ll put into it, how can they afford to purchase the property? One solution is through a lesser-known loan product.
>> Decide whether becoming a landlord is worth it.
The DSCR mortgage
It stands for debt service coverage ratio. Basically, it’s a formula designed for property investment loans that uses the property’s income potential rather than your financials to determine whether you’re eligible to receive a loan.
DSCR = annual net operating income / annual mortgage debt
Say the property you would like to purchase will make a net income (after taxes and other expenses) of $150,000 a year. And your loan payment totals $130,000 a year. Divide the net income by the loan payment. The answer you get is your DSCR ratio. In our example, it would be 1.15.
If you’re unsure how much income your property will make, it’s ok. Your loan officer will do their own supplemental report called a market rental analysis to find out.
There isn’t a DSCR ratio that guarantees you’ll get a loan, but the higher the number the better your chances. Anything above 1.0 shows the property, at least, won’t lose income. Your lender will use their calculation of your DSCR, documentation showing you have adequate assets, and your credit score to decide whether to extend credit to you.
Benefits of a DSCR loan
- Unlike a traditional mortgage, you don’t need to provide your income, employment verification, or paystubs to qualify.
- If you have employment gaps or are self-employed it won’t impact your eligibility to receive the loan.
- The loan can close in an LLC’s name instead of yours – keeping your personal finances out of the transaction.
- The closing time may be faster since the underwriting team won’t have to verify your employment or job history. This speed may help during a bidding war to ensure your property purchase goes smoothly.
Features of a DSCR loan
- It requires a minimum of 15% down payment.
- They come in loan terms of either 15 or 30 years.
- You can get a loan of $100,000 to $4,000,000 to purchase your property.
- You can use the loan to purchase residential investments and some light mixed-use investments. That means you can purchase an apartment building and possibly even an apartment with either a commercial or industrial rental space.
We are here to help you with your DSCR loan
Investing in residential property has a lot of benefits, but it’s best to work directly with a local loan officer to help you decide whether it’s the right financial move for you. Meeting with a Mann Mortgage loan officer to discuss your loan options is always free. We’re happy to calculate your DSCR, go over the loan program, and answer any questions you may have. Buying an investment property is a big move, and we want to make sure you make the best choice for your financial goals.