A DSCR loan is a type of non-QM loan specifically for real estate investors. These are only allowed on non-owner occupied investment properties. 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 traditional income. Meaning, NO Tax Returns, NO W2’s, and NO Pay Stubs are required.

Because real estate investors write off expenses like depreciation 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. Instead, the income qualification is based on the projected rental income of the subject property. This projected market rental income amount will be determined by an appraiser when the appraisal inspection is completed.

• 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
• Can be used for cash outs
• Interest-only loan option available (Cash Flow Improvement)
• Suited for new and seasoned real estate investors
• Both long-term and short-term rentals are eligible (Airbnb, VRBO, etc.*)

The Debt Service Coverage Ratio is a ratio of a property’s monthly net operating income and its monthly debt service, including principal and interest, property taxes, hazard insurance, and home owner’s association dues. Lenders use DSCR to analyze how much of a loan can be supported by the income coming from the property’s rent as well as to determine how much income coverage there will be at a specific loan amount. Here is a simple DSCR equation:

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Many lenders will require a 1.20 DSCR to qualify for a DSCR mortgage loan. However, North American Financial Corp allows real estate investors to qualify for a loan with a DSCR as low as 1.00 so that they can qualify with the cash flow of your property. Please note that interest rates are better on DSCR ratios of 1.20 or above and that a lower DSCR ratio may require additional 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, also known as the “ability to repay”.

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.

A real estate investor might be looking at a property with a gross rental income of $4,200 and a monthly debt of $3,300. When you divide $4,200 by $3,300, you get a DSCR of 1.27, which means that the property generates 27% more income than what is necessary to repay the loan. This also means that the property is cash flow positive in the eyes of the lender.

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 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 / 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.

North American Financial Corp offers these loans for borrowers with a DSCR as low as 1.00 (with exceptions as low as .80*). If you fall below that requirement, you still have tons of other loan options available to you, including the following North American Financial Corp non-QM mortgages:

• Asset-Based Loans: Asset-based mortgages, also known as Asset Depletion, 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 liquid assets instead of your income to qualify, which means you won’t have to provide a tax return or other traditional proof of income documentation.

• 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.

Begin or continue building your real estate investment portfolio without the need for a private hard money 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!