Understanding The DSCR Mortgage Program

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Are you looking for a loan to buy a new property? Most people now use mortgage programs to finance their dream homes without undergoing an extensive application and approval process. Curious about how to proceed?

In this article, let us understand the concept of the DSCR mortgage program and its benefits to borrowers and investors.

What is The DSCR Mortgage Program?

DSCR is short for the phrase debt service coverage ratio. Now, the DSCR mortgage program, also known as investor cash flow mortgage, allows you to finance your property without using your personal income.

It means you do not need to provide your W-2s, tax returns, pay stubs, and other financial or personal documents, which are all required should you proceed with a standard mortgage.

In the DSCR mortgage program, a DSCR lender only checks your ability to pay current debt obligations and not your employment when applying. Lenders need to predict the property’s rental value and check your ability to pay a mortgage based on DSCR.

How Does The DSCR Mortgage Program Work?

There are some qualifications one has to meet to qualify for this type of loan. One of which is that the rental income, which is now required instead of personal income, must meet or exceed the coverage ratio requirement of the lender.

It is favorable to people looking to acquire investment properties but has insufficient personal income to be granted a loan and get approved by lenders.

Because it is based on the rental income produced by the property, the application process is more streamlined and faster than a regular investment property mortgage.  If you are looking for one, check out The Mortgage Shop’s DSCR Mortgage Page.

What Are The Disadvantages of DSCR Loans?

Before acquiring, it is essential to have a balanced knowledge about this type of financing assistance. Alongside the benefits it provides to the homebuyers in need, some disadvantages might be a deal-breaker for you.

In some cases, the DSCR loan requires a higher down payment and may ask for a higher mortgage rate.

As inflation increases, the rates have also been increasing for the past years. It is imperative to look for mortgage brokers and lenders to understand their offers, terms, and program availability.

Researching qualification guidelines per lender, as rates and fees vary from one to another, helps to find the best and lowest rates and fees. It will save you both time and money.

What Are The DSCR Program Requirements?

Unfortunately, the DSCR mortgage program is not for everyone. Check out these requirements to be eligible for a loan should you be thinking about getting one.

Property Eligibility

Compared to standard investment property loans, the DSCR mortgages allow multiple types of properties, including non-warrantable condos and properties with more than four units. Property eligibility here is more flexible as compared to regular mortgages.

Type of Refinance

Refinancing in DSCR is also more flexible as most programs offer rate, term, and cash-out refinance options. Purchase loans are also available in this program.

It is crucial to choose the best and most suited option for your financial situation to maximize the potential of this program and help you in the long run.

Prepayment Penalty

It is also paramount to review and check your loan terms, as DSCR loans include a prepayment penalty. As investors, you must understand the fees and penalties you need and may have to pay as part of your application.

Maximum Loan Amount

The maximum loan amount varies depending on the lender. In some cases, it may reach as high as $2 million, which is higher than a standard investment property program.

Loan-to-Value Ratio

DSCR loans have a higher down payment or equity because the maximum loan-to-value ratio is usually 80%. It is higher than the standard rental property refinance but lower than the standard single unit investment property purchase loan.

Loan Program

Many DSCR lenders offer all types of loan programs that include adjustable-rate (ARM), interest-only mortgages, and fixed rates. They are available online and upon checking with different lenders.

Coverage Ratio

The coverage ratio is one of the most important qualification requirements for any DSCR mortgage loan. Most lenders use this as a defining factor when approving a loan. It is calculated using rental income written on a signed lease agreement.

There will be cases wherein the coverage ratio is less important, and this happens when the investor or borrower can make a down payment of at least 30%. It just depends on what lenders can offer.

In most cases, the coverage ratio usually moves from 1.0x to 1.5x of the mortgage payment, depending on the lender.

Photo by Raten-Kauf. Source

What Are The Qualification Guidelines For The DSCR Mortgage?

The DSCR loan qualifications include a minimum credit score of around 640, which is the same as a standard investment property loan. Depending on the lender and other factors, this may vary, but securing a high credit score will make your application move faster.

Borrower debt-to-ratio income, as discussed above, is crucial to check if you qualify.

Since lenders don’t need to verify your employment or income, your personal debt-to-income ratio will not be considered in determining your application results, thus, reducing the time it takes for your application to be approved.

What Are The DSCR Loan Down Payment Requirements?

It is imperative to understand the DSCR loan down payment requirements if you are interested in applying to the DSCR Mortgage Program. The down payment size also shifts the course of your application and loan amount.

The minimum amount for seasoned investors is 20%, while first-time investors require a minimum down payment of 30%.

Seasoned investors have landlord experiences of at least 12 months in the past 12 months. Higher down payments can still be negotiated according to the lender and his offered terms.

What Are The DSCR Current Loan Interest Rates?

Alongside the increased products due to inflation, the DSCR loan interest rates also increased during the past years. It is important to understand interest rates as they will affect how you will go about your chosen plan and application.

As of June 14, 2022, the 30-year fixed cash-out refinance has the highest interest rate of 5.375% with 4.875% and an APR of 5.830%. Its counterpart in the fixed purchase has the same interest rate but lower points at 5.375% and an APR of 5.879%.

The 40-year fixed cash-out refinance (interest only) starts at an interest rate of 6.125%, with points at 1.875% and an APR of 6.277%. The interest rate for a 40-year fixed purchase (interest only) is still the same, but points increased to 2.625% and an APR of 6.339%.

Lastly, the 6-Month SOFR ARM cash out refinance mortgage starts at an interest rate of 2.990% with 3.500% points and an APR of 3.768%.

Final Thoughts

Applying to the DSCR Mortgage Program will be advantageous to investors looking to finance their properties without undergoing the extensive application process.

The DSCR matters a lot since it dictates the course of action by the lender –- either your application will go through or not. Computation of the DSCR will be crucial for both the lender and borrower, but note that the calculation method might be slightly different.

A lower DSCR might be discouraging, but you can still increase it by consulting with professionals who can help you. Inquire more about these rates and other offers at The Mortgage Shop.

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