What is Debt Service Coverage Ratio?
Debt Service Coverage Ratio or DSCR is a ratio underwriters use for mortgages on investment property to determine if the property can carry the mortgage debt and other expenses associated with owning and operating the property.
Why is DSCR important?
Lenders often determine whether or not to lend money on investment properties based on the DSCR. There are many tax advantages to owning investment property. If you want to be approved for an investment property mortgage, you should know about DSCR.
How is DSCR calculated?
DSCR is the inverse of DTI (Debt to Income ratio) that underwriters use to evaluate a borrower’s capacity to handle mortgage debt. With DSCR, you take the income from an investment property and divide it by the mortgage payment including taxes and insurance.
Example of DSCR Calculation
Let’s say you want to buy a three family house for $500,000. You can put down 20% so your mortgage will be $400,000. The rental income from three units add up to $4,500 per month. Your monthly mortgage payment including taxes and insurance is $3,950. Divide $4,500 by $3,950 and you get a ratio of 1.14%.
What is a “good” DSCR?
Just like there are general guidelines for an acceptable debt-to-income ratio, so are there general guidelines for an acceptable debt service coverage ratio. Some programs require a DSCR of 1.25% or higher. Other programs allow the rental income to be less than the mortgage payment. In general, the higher the DSCR, the better the interest rate.
What is a DSCR loan?
A DSCR loan is a loan that is underwritten purely on the income from the property being financed. In this regard, it is often referred to as a “no doc” or “no income check” loan because you do not need to verify income from employment to qualify.
What is the downside to a DSCR loan?
As with any loan where you don’t verify income, the rates will be higher for a DSCR loan.
Who needs a DSCR loan?
Borrowers who are buying or refinancing investment property and who cannot qualify using tax returns or bank statements to verify their income.
If you are buying or refinancing an investment property and would like to learn more about DSCR loans, call Amerifund at (888) 650-7316 to speak to an experienced loan officer. Or fill out this form and someone will contact you.
(c) Copyright Eris Saari 2019