Investing in real estate can be a lucrative opportunity for individuals looking to build wealth and generate passive income. However, obtaining financing for investment properties can be a challenge, especially for investors with complicated income or multiple rental properties. This is where DSCR mortgages come into play.
DSCR, or debt service coverage ratio, is a metric used to determine your ability to make mortgage payments based on the profitability of the subject property. It measures the ratio of a property’s income to its debt obligations, including the mortgage payment. A DSCR of 1.0 means that the property’s income is equal to its debt obligations (taxes, insurance, HOA, mortgage payment, etc), while a DSCR of less than 1.0 indicates that the property’s income is insufficient to cover its debt obligations.
A DSCR mortgage is a type of loan that is underwritten using the debt service coverage ratio rather than your personal income. This means that investors with complicated income or multiple rental properties can qualify for a DSCR mortgage without having to provide extensive documentation of their financial history because it is not used to qualify for the mortgage.
To qualify for a DSCR mortgage, the property’s DSCR must meet certain requirements. Typically, the minimum DSCR is 1, although this can vary depending on the investor, your history as an investor, and the property’s location and type. In addition, there are some minimum credit score requirements and typically they require a minimum down payment of 20% in many cases.
First-time investors can also qualify for DSCR loans, even if they do not have a long credit history or substantial personal income. This makes it easier for new investors to enter the real estate market and start building their investment portfolio.
Overall, a DSCR mortgage can be a useful tool for real estate investors. By using the property’s income to determine eligibility, rather than the your personal income, DSCR mortgages offer a more flexible and common sense financing option.