DSCR Loans Offer a Path Forward for New and Seasoned Investors

DSCR Loans Offer a Path Forward for New and Seasoned Property Investors

If you’ve always considered investing in a business-purpose property, 2022 may be the year you put your plans into action.

The residential rental market continues to make headlines with a strength and robustness attributable to a confluence of factors.  Millions of Millennials, now on the cusp of turning 40 and raising families, are looking for more space, as is a growing remote workforce.  Such peak demand, along with low inventory, is driving home sale prices way up above and beyond what many, especially first-time homebuyers, can afford. The National Association of Realtors reports that the median home sale price increased 16.9% to $346,900 from 2020-2021—the highest value on record since 1999 (CNN).

As a result, millions of Americans who would normally be looking to buy a home are compelled to rent one in order to get the space they need and lifestyle they want. This is fueling an unprecedented rise in rental income. Zumper, an online platform that helps landlords find qualified renters, notes that the median rent for a two-bedroom apartment grew more than 14% last year. Rents are particularly high in cities like Boston, New York and San Francisco. And they’ve grown more than 20% for two-bedroom units in Fort Lauderdale, Miami, Orlando, Tampa, San Diego, Scottsdale and Seattle (Fortune). 

Attracted by these lofty rental prices, investors are snapping up single-family residences (SFRs), townhomes, two- to four-unit properties, non-warrantable condominiums and planned unit developments (PUDs). Some are first-time investors, often wealthy individuals looking to diversify their assets, while others are more experienced buyers building on existing portfolios.  In all cases, a DSCR or Debt Service Coverage Ratio loan is often used to finance the investment.

What is a DSCR loan? DSCR stands for Debt Service Coverage Ratio.  Simply put, these loans are repaid using the income from the property to be purchased or refinanced.  They’re called Debt Service Coverage Ratio loans because of the formula used to qualify the loans validates whether the property will generate sufficient cash flow to cover the monthly debt payments.  The formula itself is straightforward. Take the monthly  gross projected rental income as determined based on an existing lease agreement for an appraiser opinion of market value rent.  Then divide that  operating income by the total, monthly  amount of the loan payments. If the resulting quotient is 1.0, the ratio of income to debt is break even. A quotient greater than 1.0 indicates positive cashflow after the debt is serviced. If the quotient is less than 1.0, a DSCR loan may still be possible provided the investor has other assets and income sources to cover any potential shortfall. 

DSCR loans are attractive for a number of reasons.  First, because repayment ability is based on income from the property vs. employment income (as with a regular mortgage), these loans work for investors who don’t always get a steady paycheck (think business owners, self-employed, retirees).  For the same reason, first-time investors don’t have to demonstrate a track record with income-generating properties. In addition, DSCR loans can be used to finance properties featuring short or long-term rentals. 

Some lenders also offer DSCR programs for foreign nationals looking to invest in the U.S. rental market.  . 

So what, exactly, do these loan look like? Deephaven, which offers DSCR loans through mortgage brokers and lenders (in addition to a slew of Non-QM mortgage products and programs such as bank statement and asset utilization loans), lends up to $2 million on assets with a minimum DSCR ratio of 1.0x and up to $1.5 million on assets with a minimum ratio  of 0.75x.  Deephaven also offers a cash out option up to $500,000 for property investors who want to use a DSCR loan to refinance and take equity out of existing holdings to purchase more properties for their portfolios.  

In line with its flexible, pro-borrower approach, Deephaven underwrites DSCR transactions with loan-to-value ratios (LTVs) up to 80% (70% for first-time borrowers).  And borrower credit scores can be as low as 620 (adjusting amounts and terms accordingly).

To be eligible for Deephaven DSCR loans, borrowers must also:

  • Make a minimum 20% down payment
  • Be able to vest through an LLC or corporation
  • Have 6 months of reserves in a US FDIC-insured bank

Meanwhile, the rental market shows no sign of cooling off. In fact, Realtor.com® economists expect rents to grow by 7.1% in 2022. A Non-QM/Non-Agency DSCR loan offers a pathway for investors to get in on the action.