The short version
A DSCR loan is for investment property only, not a home you'll live in. Instead of qualifying on the borrower's personal income and tax returns, it qualifies on whether the property's rent covers the property's monthly debt.
DSCR stands for debt service coverage ratio. I place DSCR loans, and DSCR second mortgages, on investment property in Georgia and Florida.
What the lender compares
On one side is the rent, generally taken from a lease or from the appraiser's estimate of market rent. On the other is the property's monthly debt, which generally includes:
- principal and interest
- property taxes
- insurance
- association dues, where there are any
What still gets reviewed
A DSCR loan isn't a "no-doc" loan. Income is still documented; it's the property's income rather than the borrower's. The lender still reviews:
- credit
- the down payment, or the equity in a property being refinanced
- money held in reserve
- the property itself, through the appraisal and its rent estimate, or a lease
Short-term rentals and LLCs
DSCR loans aren't limited to long-term leases. I also place them on short-term rentals held as investment property, not a home the owner lives in for part of the year. How the rent is counted varies by lender.
A DSCR loan can also be made to an LLC rather than to a person, depending on the lender. The lender generally still reviews the credit of the people behind the LLC, and usually asks them to guarantee the loan personally. Both of these apply to DSCR second mortgages as well as first mortgages. Whether to own a property through an LLC is a question for an attorney or a tax professional, not for a loan.
Standards vary by lender
DSCR standards vary from lender to lender more than they do on agency loans like conventional or FHA. Each lender sets the ratio it looks for, the kinds of property it accepts and what it asks to see in reserve, and those standards change. As a broker, I can look at more than one lender's program.
Why it's investment property only
These loans are generally made for a business purpose. Because of that, some of the consumer rules and disclosures that come with a loan on a home you live in may not apply in the same way. Ask which disclosures come with the loan.
If the plan is to live in the home, a DSCR loan isn't built for that. Other programs are.
DSCR second mortgages
A DSCR second mortgage works on the same idea, and keeps the first mortgage on the property in place. It's also for investment property only, including short-term rentals, and it can be made to an LLC, depending on the lender.
Try it with your own numbers.
The calculators don't model DSCR loans or rental income. To see how a loan amount and interest rate you enter split each payment between interest and principal, use the Amortization tab.
Questions? Ask Joe
How this applies to your situation is something I can go through with you personally, as a licensed loan officer. Florida (561) 320-2211 or Georgia (678) 289-6600, call or text. Or email info@homeexpress.com.
Talk to Joe