Demystifying Debt Service Coverage Ratio (DSCR) Loans

Defy Mortgage
Jun 7, 2023 • 2 min read
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Simplified Mortgages For Real Estate Investors


Our DSCR mortgages are easy to qualify for, making them a popular Non-QM loan. DSCR programs don’t require you to provide or verify your personal income or employment history. Instead, qualification is based on the property's Rent vs. (PITI) principal, interest, taxes, and insurance. That being said, sufficient cash flow is used for eligibility purposes.

Let’s delve into the intricacies of DSCR loans and what real estate investors need to know.


DSCR Loans Fall Under The Non-QM Umbrella

Non-QM loans are for borrowers who don’t meet the “traditional” Qualified Mortgage (QM) criteria but are still creditworthy. They have more flexible underwriting standards, including the ability to use alternative forms of income verification, such as rental income and options for no-tax returns.

Several types of Non-QM loans – such as DSCR loans – are available, each designed to meet different borrowers' needs and circumstances.


DSCR Calculation & Accepted Ratio

When securing loans for real estate investments, understanding the Debt Service Coverage Ratio (DSCR) is essential.

DSCR is calculated by dividing Gross Operating Income by Total Debt Service (PITI):

DSCR = Gross Operating Income / Total Debt Service

An Example:

NOI  =  $120K per year ÷ Total Debt Service = $100,000

DSCR = 120,000100,000 = 1.20X

This ratio indicates that NOI covers debt service 1.2X times.  It’s common to see an “x” after the ratio, which indicates the number of times the NOI covers debt service

The aforementioned result signifies the property's ability to generate sufficient cash flow to cover the debt obligations. A higher DSCR indicates a stronger ability to meet qualification requirements.

The ideal DSCR range varies depending on the lender, type of loan, and specific circumstances. At Defy, we allow for negative DSCR ratios down to .75.


DSCR Use Cases

Overall, DSCR is a popular option for both seasoned investors and newcomers alike.

Not only can you purchase properties using DSCR, but you also have the option to use the loan to complete renovations or to finance additional real estate investments.  Taking cash out is a great way to improve your properties and grow your investment portfolio.


Defy’s DSCR Program Highlights

  • Up to 85% Max LTV
  • Minimum DSCR ratio of .75
  • No employment or income verification
  • Foreign nationals and non-permanent residents are eligible to apply
  • No maximum loan amount
  • Fixed, Interest Only, and ARM rates available
  • Qualifications: minimum 3 months reserve and 620 minimum FICO.


The Rise in Popularity of DSCR Loans

Real estate investing has become an attractive option for growing potential cash flow among several other compelling reasons. These include building equity, portfolio diversification, and tax benefits – all the same benefits associated with homeownership.

Because real estate investors are the primary demographic for DSCR loans, the rise in the mortgage’s popularity can be seen as a direct correlation with the rise of real estate investing.

Another reason for the increased appeal is that, according to The M Report, “DSCR loans offer long-term financing at reasonable terms, which make them an excellent option for private money or ‘hard money’ loans.”


Personalized DSCR Loans

At Defy Mortgage, we offer DSCR loans along with a vast portfolio of other Non-QM products. We will work with you to tailor each loan to your specific needs.  DSCR loans play a pivotal role in the lending landscape by helping borrowers assess the financial viability of real estate investments. By understanding DSCR loans and other options, borrowers can plan their financial strategies effectively, ensuring sustainable cash flow and financial stability.


Is A DSCR Loan Right for You?

A Debt Service Coverage Ratio mortgage is a perfect non-QM program under the right circumstances to help reach your financial goals.

We are ready to help! Visit our website, to learn more about our DSCR services and how we can assist you in reaching your goals.

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