Debt-Service Coverage Ratio (DSCR) Loans

For property investors and individuals in unique financial situations, the Debt-Service Coverage Ratio (DSCR) can be a valuable tool that paves the way for financing, even if your personal income doesn’t meet traditional lending standards. With a DSCR loan from First Union Home Finance, the key to approval lies in the income generated by the property itself.

What is the Debt-Service Coverage Ratio (DSCR)?

The DSCR calculates the ratio between a property's net operating income (NOI) and its total debt service (the sum of the loan's principal and interest payments). This financial metric is used to determine whether a property generates enough income to cover its mortgage payments.

A DSCR of 1.2 or higher is typically considered favorable, indicating that the property generates at least 20% more income than is required to meet loan payments. The higher the DSCR, the more financially stable the investment is seen to be.

Curious to see if you qualify?

Who Benefits from a DSCR Loan?

A DSCR loan is perfect for investors in real estate and borrowers who rely on rental income or commercial properties to create revenue. Unlike conventional loans that focus on personal income and employment history, a DSCR loan allows borrowers to qualify using the property’s cash flow. This means you could be approved for financing even if your personal income is not high enough or does not meet typical lending criteria.

Here are some examples of those who can benefit from DSCR loans:

  • Real Estate Investors: If you own or are looking to acquire rental properties, a DSCR loan enables you to qualify based on the rental income generated by your investments. Whether you're new to property investment or have an extensive portfolio, a DSCR loan can be a smart solution.
  • Self-Employed Borrowers: Traditional mortgages often require proof of steady personal income, which can be challenging for self-employed individuals with variable earnings. With a DSCR loan, the focus shifts from your personal income to the income generated by the property itself.
  • Retirees and High-Net-Worth Individuals: Even if you’re not earning a traditional salary, you can use the revenue generated by your property to qualify for a DSCR loan.

DSCR Loan Requirements

While DSCR loans offer flexibility, there are specific eligibility criteria to keep in mind:

  • Property Income: The primary requirement for a DSCR loan is that the property generates enough income to meet the minimum DSCR ratio. The higher the income-to-debt ratio, the greater your chances of approval.
  • Down Payment or Equity: Like traditional loans, DSCR loans typically require a down payment or existing equity in the property. Down payments generally range from 20-25% for investment properties.
  • Loan-to-Value (LTV) Ratio: The LTV ratio reflects the amount borrowed compared to the property’s value. Most DSCR loans have an LTV ratio cap of 75-80%, meaning you’ll need at least 20-25% equity or cash down.

The Process of Applying for a DSCR Loan

The process of applying for a DSCR loan with First Union Home Finance is straightforward. Here's what to expect:

  • Gather Financial Documents for the Property: You’ll need financial information for the property, such as rental income, operating expenses, and any documents related to existing debts or liens.
  • Property Appraisal: Just like with a traditional mortgage, an appraisal will be ordered to assess the property’s value and income potential.
  • Down Payment Requirements: Be prepared to make a down payment of at least 20-25% or have that amount in equity if you already own the property.
  • Underwriting and Approval: Once you’ve submitted all necessary documents, the underwriter will review the property’s financial performance to ensure it meets the lender’s DSCR and other criteria. If everything checks out, you’ll receive loan approval.
  • Closing: After approval, you’ll sign the loan documents, cover any required closing costs, and officially secure financing for your investment property.

First Union Home Finance’s experienced mortgage professionals are ready to help you explore how a DSCR loan can help you achieve your financial goals. Fill out the form below to get started!

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