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DSCR Loans - No Income

DSCR.  Debt Service Coverage Ratio.  This four word acronym is defined as an entity's ability to pay back its obligations based on cashflow alone.  When it comes to mortgage lending, you traditionally are required to gather and submit scores of income-related paperwork to meet the strict guidelines of government or conventional mortgage loans.  The DSCR loan completely removes the need to document personal income, and instead qualifies a borrower based on the property's ability to cash flow after housing expenses are satisfied.  Through the DSCR program, real estate investors without strong income documentation or history can now enter investments so long as they meet down payment and credit requirements.

Work From Home

DSCR loans are no income loans.  We do not require tax returns, paystubs, 2 years of employment, offer letters, or anything that you may expect of a mortgage loan.  Cash flow is the highest prioritized requirement that a DSCR lender will examine when you apply for a DSCR purchase or refinance loan.  This program is an excellent tool for investors, especially those that cannot prove employment or do not display enough taxable income after deductions.

Let's take a closer look at this program:

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  • Typically Fast Turn Times

  • No Income, No Employment History

  • As Low as 15% Down, Extremely Low for DSCR

  • Interest-Only Options Available to Maximize Cash Flow

  • Both Long and Short Term Rental Strategies Are Considered

  • No Seasoning Requirement On Cash Out Refinance After Purchase

  • Competitive Rates, and Options for Credit Scores in 600 Range

 

A no income loan will have a higher interest rate.  This should not be a huge surprise, considering the risk to the lender that accompanies the flexibility of not requiring income documentation.  However, with the ability to use interest-only options, and the ability to purchase a home with no income, the DSCR loan is an effective tool to expand one's portfolio of investment properties.

DSCR Loans

Minimum FICO Score: Varies
Available Loan Terms: Varies
Minimum Down Payment: Varies, 20% Normally
Maximum Rate/Term Refinance LTV: Varies
Maximum Cash Out Refinance LTV: Varies, 75%-80%
Time From Bankruptcy: Varies
Time From Foreclosure/Short Sale: Varies
Mortgage Insurance (Y/N): Usually None
Eligible Use: Investment Only, No Primary Allowed
Eligible Properties: Residential 1-4 Unit Properties
(Condos & Townhomes Eligible, Including Non-Warrantable)

What you should immediately understand, and may already understand having read through the initial description, is that DSCR loans are underwritten entirely differently compared to full documentation loans.  What is most important for you to understand is how the DSCR calculation is performed.

 

As the name suggests, the DSCR is a numerical value.  While many investors think that the minimum DSCR needed to qualify for a DSCR mortgage is 1 or more, this is not necessarily true, as there are no-ratio programs for those who may not be able to display a qualifying DSCR value.  Ideally, your property will have a DSCR of higher than 1.

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The DSCR is calculated with the following formula:

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DSCR = Gross Rental Income/Total Annual PITI(A) Payments

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Gross rental income is your total revenue with nothing subtracted, while your obligations would be your total monthly mortgage payments, including principal, interest, taxes, insurance, and HOA dues if applicable.

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So for example, if you were looking to purchase a property with a DSCR loan program and expect to generate $50,000, while your total annual PITIA payments add up to $40,000, your property will have a DSCR ratio of 1.25, which is a solid figure.

 

    Interest-only options allow investors to focus on maximizing immediate cashflow each month, and may also help in achieving a higher DSCR ratio.  ITIN-only and foreign national borrowers may also be eligible to utilize DSCR programs.  DSCR lenders may also provide more favorable terms to investors that can provide proof of investing experience, usually meaning at least one or two investment properties owned over the past year or two, but beginning investors are just as welcomed.

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Bear in mind that DSCR loans are for investment-purpose properties only; they cannot be used to purchase any kind of owner occupied properties.  Gift funds may be used for down payments with some exceptions.

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Getting Prepped for Approval

Documentation requirements for DSCR loans are much more relaxed than many mortgage loans.  The absence of personal income documentation requirements is an incredible opportunity for many investors with unorthodox income sources (or none at all).  


However, DSCR lenders will still want to see your credit history, proof of down payment funds, and potentially your investor experience level (though brand new investors are not prohibited from approval).  To see what documents you'll need for conventional loans, check out our prior to approval checklist page.

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