A debt service coverage ratio (DSCR) loan is one that qualifies borrowers based on the property income (investment property’s cash flow) rather than the borrower’s income.
DSCR loans (also known as invest or cash flow loans) are frequently used by real estate investors to qualify for mortgages and buy investment properties. The debt service coverage ratio (DSCR) is the ratio of an investment’s net operating income to its total debt service. It is a way of determining whether the property generates enough income to support its current debt obligations.
This loan is best used to avoid having to submit income documents and having to be qualified with personal income.
For example,
Debt Service Coverage Ratio = Net Operating Income / Debt Service
Net Operating Income = Rental Income Received
Debt Service = Principal + Interest + Property Taxes + Homeowners Insurance + Possible HOA
So, if
Net Operating Income (Rental Income Received) is $2,500
and the Debt Service is $1,900
we would divide $2,500 by $1,900 to equal 1.32% which would be our Debt Service Coverage Ratio.
Quick Pro Tip! Anytime the DSCR is >1.25% the loan terms improve so consider increasing rents and/or decreasing your loan amount to increase your DSCR for better financing.