Flash back to the 2008 financial market crash. A toxic mix of adjustable-rate mortgages and subprime borrowers led to a major recession. In its wake, the government introduced new regulations for banks to follow when issuing property loans. Those regulations made it much harder for real estate investors to acquire loans for house flipping and rental properties through major financial institutions. However, they allowed private lenders to introduce a new concept: the debt service coverage ratio (DSCR) loan.
What Is a DSCR Loan?
Traditional banks rely on a borrower’s assets, income, and credit history to make a lending decision. That isn’t the case with a DSCR loan. Lenders that offer DSCR loans examine a property’s cash flow potential during the qualification process. There’s less concern about the borrower’s ability to repay, and more about whether the rental income will cover the mortgage debt. A DSCR lender uses a single basic metric to qualify borrowers: cash flow divided by monthly debt payments. If the ratio exceeds 1, the borrower may be eligible for the loan.
To see how this works, assume a property can generate $2,500 monthly in rental income. Maintenance, management, taxes, and insurance are $350 a month. The borrower can buy the property for $300,000 with a 30-year mortgage at 6.3% interest — a $1,857 monthly payment. With the additional $350 in property expenses, that works out to $2,207, leaving a positive monthly cash flow of $293. Based on the metric, the DSCR ratio is $2,500/$2,207, or 1.13. The borrower may qualify for the loan since the ratio is above 1.
While rental income is the main determinant in rental property cash flow loans, some lenders consider credit score, too. However, tax returns and pay stubs are usually not a deciding factor.
How DSCR Loans Maximize Cash Flow
The DSCR loan is a real estate investor’s best friend. Since it’s based on the property’s potential earnings rather than the investor’s income, it’s easier to qualify for. That’s especially true for self-employed investors with fluctuating earnings or those who want to buy more expensive properties like multi-tenant units.
Some DSCR loans offer much lower monthly payments than what’s available through a traditional bank. Reduced interest rates help keep debt payments below the property’s rental income, allowing for a more positive cash flow.
It’s possible to obtain multiple DSCR loans, even if an investor doesn’t have the assets or income to sustain the monthly payments themselves. That’s because DSCR loans consider the property’s projected cash flow and expenses as the benchmark approval criteria. Investors hoping to expand their portfolio to include multiple properties may find that feature especially attractive.
DSCRs also offer a quick approval process. Instead of waiting weeks for loan approval, the investor may find out within just a few days. That makes it easier to jump on available properties when they come available, rather than needing to go through lots of red tape.
Dominion Financial’s DSCR Loan Features
With over 20 years of experience in real estate investing and lending, Dominion Financial Services offers some of the best DSCR terms in the industry. Our lending programs feature the terms real estate investors want the most — a quick approval process and industry-best rates. Our 30-year fixed-rate DSCR loan works for investors interested in building a portfolio of high-performing rental properties, and includes a price-beat guarantee.
Through Dominion Financial’s DSCR program, investors can finance up to 80% of a property’s loan-to-value (LTV) amount. Our loans are available to those seeking to finance single-family and multi-unit rental properties with a minimum value of $100,000. Dominion Financial also offers fix and flip loans with up to 100% ltc for both purchase and rehab costs.
Get started with us today by requesting a quote.
