Have you heard about Debt Service Coverage Ratio (DSCR) loans for real estate investors? These loans can be crucial for financing purchases and refinances. If you have not heard of this, don’t worry, at Hurst Lending we speak to investors every day who are new to debt service coverage ratio loans as well. These loans are tailor made for real estate investors. Let’s take a closer look at why every real estate investor should know about Debt Service Coverage Ratio loans.
What is a Debt Service Coverage Ratio (DSCR) Loan?
A DSCR loan, also known as an Investor Cash Flow loan, is designed to use the monthly cash flow from an investment property to qualify for a mortgage, instead of the investor’s personal income. Why is it important to have access to this type of loan? Many investors have very complicated tax returns that minimize income by using write-offs to minimize taxable income from their real estate portfolio. While this helps reduce an investor’s taxable income and resulting tax bill, it also puts pressure on the investor’s debt to income ratio (DTI). If their income is too low, the DTI could exceed the allowable levels required to qualify for a new loan. This is where the DSCR loan steps in to provide a solution!
When applying for a DSCR loan, the investor’s paystubs, annual W-2 statements, and federal tax returns are not used in the qualification process. The monthly gross rent that the property generates is the income used to qualify for a mortgage. The “gross” aspect is important to note, because more conventional investment property loans use “net” rents after a vacancy factor has been applied. The gross rental income can be either monthly payments associated with an annual lease, or it can be monthly short term rentals from a property that is rented out via online rental websites such as AirBNB, VRBO, or Vacasa.
DSCR Loans are for business purposes only. This means that the property you are buying will be used as an investment property ONLY and it will not be used as your primary residence. Buyers are free to use the property occasionally as a vacation home, but the primary purpose is to rent the property out to generate income. Since these are business purpose loans, Hurst can close in the investor’s personal name, or in the name of an LLC.
Hurst Lending has many options for your DSCR loan needs. We can finance single family homes, townhomes, condos, non-warrantable condos, condotels, and multi-family properties with DSCR loans. Call us today or visit www.hurstlending.com for more information.