A DSCR loan lets you buy a rental based on what the property rents for, not what you make at your job. The lender mostly asks one thing: does the rent cover the payment?
Here's what we look at before getting excited about a rental deal.
What is a DSCR loan?
DSCR stands for debt service coverage ratio. Fancy name, simple idea. Instead of digging through your W2s, tax returns and pay stubs, the lender looks at the property. If the rent can cover the mortgage payment, the deal can work.
That helps a lot if you're self employed, if your tax returns don't show much because of write offs, or if you already own a few properties and your debt to income looks stretched. The property does the talking.
How do you calculate it?
Most programs take the monthly rent and divide it by the full monthly payment: principal, interest, taxes, insurance, and HOA if there is one. Some lenders do it a little differently, so always ask.
Over 1 means the rent covers the payment. Under 1 means you're covering the gap out of your own pocket every month. Lenders set their own minimums and they change deal to deal, so we won't throw a number at you here. What matters is that you can run it yourself before you call anybody.
What rent do I need to qualify?
Enough to cover the payment, and lenders usually like a little cushion on top. The exact number depends on the lender and the loan.
Taxes and insurance move the payment more than people expect, so a cheap looking purchase price can still be a tight deal. Don't forget your own costs either: repairs, vacancy, and property management if you use it.
How is it different from a regular mortgage?
Way less income paperwork. You're usually looking at a lease or a rent appraisal instead of pay stubs. The tradeoff is that the down payment is usually bigger than a regular mortgage, and rates and costs are often higher than conventional, since the lender is leaning on the property instead of you.
It's worth it when the deal pencils and not worth it when the numbers are thin. It's also only for investment properties, not the home you live in. Rates and down payments change with the deal and the borrower, so we won't quote any here.
What should you know about Ann Arbor, Lansing and Grand Rapids?
Ann Arbor has strong rental demand thanks to U of M, but you pay for it. Prices and taxes run higher, so run the numbers hard. Lansing has lower prices and steady demand, which makes it easier to get a first DSCR deal to work. Grand Rapids sits in the middle with growing demand.
Honestly the math matters more than the city. A well bought duplex in Lansing can beat a so so fourplex in Ann Arbor.
1Can I use a DSCR loan on my primary home?
No, it's for investment properties.
2Do I need tax returns?
Usually not to prove income. The lender will still look at your credit, your cash reserves and the property.
3What if the rent doesn't cover the payment?
Some lenders have options, usually with more money down. Others will pass. Ask before you fall in love with a property.
4Can I buy in an LLC?
Many lenders allow it. Ask up front so it doesn't slow you down later.
Got a property in mind?
Send over the address and the rent and we'll run the numbers together at Gold Star Mortgage Financial Group. What market are you looking at right now?
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