My last two posts focused on Real Estate Owned (REO), and how rental homes impact the conventional mortgage underwriting process. This post covers a special type of loan for investors buying rental homes. The loan is called a Debt Service Coverage Ratio (DSCR) loan.
The DSCR loan enables the borrower to skip the standard personal employment and income component of underwriting. Instead of reviewing the borrower’s tax returns, pay stubs, W2s, 1099s, etc., the underwriter simply compares the projected rental income to the mortgage amount – Principal + Interest + property Tax + home Insurance + Association (HOA) fees, or “PITIA.” For long-term rentals, the monthly rent is established by the appraiser, who officially documents the market rent for the subject location. Then the gross market rent is divided by the PITIA to determine the DSCR.
For example, if the market rent is $2,500 and the PITIA is $2,000, the DSCR is 1.25. Bottom line, if the market rent is equal to or higher than the PITIA, then the loan is approved. If it is a little lower, there is still a way to make it work. More on specific guidelines in a moment. First, some exciting news about this program.
At Dunwoody Mortgage, we can also do DSCR loans for short-term rental (AirBNB) homes. The guidelines are more complicated so I will not go into those details here. Call me for more information.
Now for the specifics of the program. We can do DSCR loans (purchases and refinances) on 1 – 4 unit residential properties with loan amounts up to $3,500,000. The required DSCR depends on the loan criteria. For example, for a $1,000,000 loan using a 700+ credit score and a 20% down payment, the minimum DSCR is 1.00. For a $1,000,000 loan using a 700+ credit score and a 25% down payment, the minimum DSCR is 0.75.
Typical mortgage guidelines regarding credit report details and proof of assets to close the loan apply, but the standard employment and personal income components of underwriting are replaced with the DSCR analysis.
There are a number of other requirements to consider, including:
- Interest rates for DSCR loans are usually higher than rates for conventional owner-occupied home purchases and refinances.
- The DSCR loan is for rental / investment homes only.
- The subject property cannot be occupied by the borrower nor a family member of the borrower.
- DSCR borrowers should own a primary residence. Borrowers who do not own a primary residence may be eligible by exception.
- The properties can be purchased in the name of an LLC, not the individual. (But the individual must submit to a credit check and show proof of assets to close the loan.)
- First-time home buyers are not eligible.
- First-time investors are subject to more stringent underwriting.
- Minimum credit score for the referenced DSCR program is 640.
- Interest-only DSCR loan options are available.
- Reserves are required. Reserves are cash assets remaining in the borrower’s accounts after funding the closing. A minimum 2 months PITIA for the subject property is required as reserves for the referenced program. Loan amounts greater than $1,500,000 require 6 months of PITIA. Loan amounts over $2,500,000 require 12 months of PITIA.
Want to buy a rental home in Georgia without submitting your tax returns and other personal income data? Contact me now and we can discuss all of the DSCR details to see if this is the right financing option for you.
