Are you a real estate investor who can’t qualify using W2s or tax returns? Then a DSCR (debt service coverage ratio) loan might be right for you. First, let’s go some FAQs about DSCR loans.

What is DSCR?

DSCR is a ratio of monthly rent to monthly mortgage payment.

How do you calculate DSCR?

Divide monthly rental income by monthly mortgage payment. Here’s an example: let’s say you’re buying a 2 family home for $900,000. You plan on putting down 20% and borrowing $720,000 (80% of the purchase price). The rental income from the 2 units totals $6,000/month. The property taxes are $5,000/year and insurance will run about $1,000 a year. What is the DSCR?

First calculate the principal and interest using a 30 year fixed rate of 7.50% and a loan amount of $720,000. That works out to $5,034 per month. Then add in monthly taxes ($5,000 per year works out to $416/month). Insurance at $1,000 a year works out to $83 a month. Add those three items up and you get $5,533 a month for the mortgage payment.

Divide monthly rent ($6,000) by monthly mortgage payment ($5,533) and you get a DSCR of 1.08. That’s how you calculate DSCR.

What is a “good” DSCR?

Most of our programs require a DSCR of at least 1.00 (meaning the rental income should be at least equal to the mortgage payment). If you have a DSCR that’s more than 1.00, you will get better terms (lower rates or points and/or lower downpayment required).

What if the DSCR is below 1.00?

We have programs that allow a DSCR of .75. We have other programs that don’t require any minimum DSCR. But if you need these sort of programs, count on putting down more than 20% and taking a higher interest rate.

How can you improve your DSCR?

Assuming you can’t increase the rental income for now, you can choose to take a loan with interest only payments for the first five or ten years. This will reduce your monthly mortgage payment which will improve your DSCR.

How does an interest only loan help your DSCR?

Let’s look at the above example. If you took a 30 year fixed interest only loan (where all you have to pay in Years 1-5 is the interest) at a rate of 7.75%, your payment would be $4,650. Once you add in tax and insurance, your payment would be $5,149. What is your DSCR? Divide $6,000/month in rental income by $5,149 and you get a DSCR of 1.17.

How much do you have to put down on a DSCR loan?

Most of our programs require at least 20% down.

Can you get a gift on a DSCR loan?

Yes! We have programs available where all you need to come up with is 10% from your own funds. The rest can be a gift from a family member.

What is the minimum credit score for a DSCR loan?

Most of our programs require a 620 score or higher. If your score is below 620, there may be things you can do (such as pay down debt) to improve your score.

What if you have a house that you rent via AirBnB or VRBO?

We can use short term rental income to qualify on our DSCR programs.

What if the house you’re buying is vacant?

We can use market rents as shown on the appraisal of the house (Form 1007).

Still have questions? Then call the DSCR experts at Amerifund! (888) 650-7316 or fill out this form CONTACT US – Amerifund Home Mortgage