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DSCR Mortgages Down Payment
DSCR mortgage loans require a 20% to 30% down payment. The down payment depends on the borrower’s credit score. The lower the credit scores the higher the down payment requirement on DSCR loans. There is no income tax returns required on DSCR loans.
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This discussion was modified 1 year, 8 months ago by
Eric Jeanette.
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This discussion was modified 1 year, 8 months ago by
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1 Reply
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DSCR (Debt Service Coverage Ratio) mortgage loans are a unique type of financing primarily used by real estate investors to qualify for rental property loans. Here’s how they work:
- Based on Property’s Income, Not Borrower’s Unlike traditional mortgages that focus on the borrower’s income, employment, and credit score, DSCR loans rely heavily on the rental income generated by the subject property.
- DSCR Ratio Calculation The DSCR is calculated by taking the annual rental income from the property and dividing it by the annual mortgage payment (principal, interest, taxes, insurance). Most lenders require a minimum DSCR of 1.0 to 1.25.
Example: Rental Income: $30,000 per year Annual Mortgage Payment: $24,000 DSCR = $30,000 / $24,000 = 1.25
- Personal Income/Employment Not as Crucial Since qualification is property-centric, the borrower’s personal income sources or employment situation are less emphasized, making DSCR loans ideal for self-employed or investors without W2 income.
- Credit Score Flexibility While credit scores are still considered, DSCR lenders tend to have more flexible credit requirements, approving borrowers with scores as low as 620-640 in some cases.
- Down Payment Requirements Depending on the DSCR and the investor’s experience, down payments range from 20-35%+ for investment properties.
- Loan Amounts & Repayment DSCR loans can provide higher loan amounts based on the rental income. Repayment of principal and interest comes solely from the property’s rental receipts.
- Interest Rates DSCR mortgage rates are typically higher than owner-occupied loans, often an additional 0.5% – 1.5% over standard rental property loans.
- Short-Term Loans Most DSCR loans have a shorter term of 5-7 years and are often balloon loans requiring refinance or payoff at maturity.
The key advantage of DSCR loans is allowing real estate investors to purchase rental properties with alternative qualification methods beyond personal income and W2s. However, they involve more upfront investment and debt service depends heavily on maintaining rental income.