Benefits of Investor DSCR Loans Explained

Investor cash-flow, or DSCR (debt service coverage ratio) loans are an outstanding financing option for real estate investors in 2022, moving into 2023.  The primary benefit DSCR loans offer is that they can make it possible for real estate investors to expand their portfolios, when qualifying for conventional financing is not an option.  Another significant benefit of this type of financing is that in most cases, investors are allowed to take title to the property they are purchasing in the name of their business entity, if the entity is a LLC.  In addition, DSCR loans typically offer a much more streamlined process.  When compared to conventional financing, the amount of paperwork required from the borrower is dramatically reduced and these loans can close extremely quickly.  Whether you are a novice investor, or have been investing in real estate for decades, this program can be your best friend in today’s market.

The first, and most significant benefit of DSCR loans is that, when compared to conventional financing, qualifying for a DSCR loan can be a breeze for real estate investors.  Conventional financing can be very difficult to obtain for investors in many instances, due to tight underwriting guidelines and limitations on the number of financed properties owned.  When a real estate investor applies for a DSCR loan, they are not qualified using traditional income sources, they are qualified for the mortgage based on the Debt Service Coverage Ratio (DSCR) on the property they are purchasing.

How is the DSCR on a property calculated?  Calculating the DSCR on a particular property is extremely simple.  When an investor applies for a DSCR loan, either the current or market rents (confirmed the by the appraiser) will be used and ratioed with the monthly housing payment on the subject property.  As long as the monthly rental income on the subject property is greater than the monthly PITIA (principal, interest, taxes, insurance and association dues), then the ratio is greater than 1:1 and the borrower is qualified (in many cases, the ratio can actually be less than 1:1).

A second significant benefit DSCR loans have to offer is the ability of the borrower/investor to take title to the property in the name of their business entity at closing.  Many real estate investors prefer to hold their properties in the name of their LLC for various reasons.  While conventional financing prohibits borrowers from taking title to a new property in the name of their LLC at closing, the vast majority of DSCR programs allow the investor to do so.  In some instances, this aspect of DSCR loans alone draws many investors to this type of financing.

A final, and wonderful benefit DSCR loans offer to investors is ease of processing.  Since the borrower’s ability to repay this type of loan is determined by the DSCR on the subject property instead of traditional income sources, processing these types of loans can be an absolute breeze and extremely fast.  Income verification can be one of the most time-consuming and paperwork-heavy aspects of mortgage underwriting, especially for self-employed individuals.  As there is no income to be documented or verified for these types of loans, the borrower does not need to provide tax returns, W2’s, pay-stubs, etc. to underwriting.   Hence, the loan process for DSCR loans is extremely easy on the borrower and they typically close very quickly.

In conclusion, if you are planning on purchasing investment property at any time in the near future and find that conventional financing is not the right fit, exploring DSCR loan options is your next move.  Offering a much easier path to approval, the ability to close in the name of your LLC, in addition to a fast and easy process, a DSCR loan may be just the right tool for your next acquisition.

If you are a prospective real estate investor and would like to learn more, please feel free to reach out to me any time.

Peter Vrehas

Broker/Owner

NMLS: 250949

Naples Mortgage Company, LLC