What Landlords Should Know About DSCR Loans

Performance Property Real Estate Question

Q: I am a real estate investor. I need a mortgage loan but I’m having trouble getting a conventional loan like the one I got when I had a regular job. What can I do? Dee, Vauxhall, NJ

A: DSCR loans allow landlords to qualify for a home loan without having to fork over personal financial information like tax returns or W2s. DSCR stands for debt service coverage ratio and a DSCR loan is a type of no-income verification mortgage loan. DSCR loans are ideal for landlords who own income-generating properties, particularly when they can’t qualify for a conventional loan. The main benefits of DSCR loans are ease and speed.

The reason why lots of personal financial information is not required for a DSCR loan is because borrowers qualify for a DSCR loan based on the property’s cash flow, not based on the borrower’s income. A DSCR loan enables landlords and real estate investors to get a mortgage loan because it takes into account cash flow from investment properties rather than pay stubs or W-2s, which many investors do not have because deductions from properties often lower taxable income, making it hard for investors to demonstrate a lot of net income.

As with any type of financial instrument, there are drawbacks associated with DSCR loans that include large down payments (usually 20% or more), higher interest rates than conventional loans, prepayment penalties and the fact that you can’t get DSCR loan on a primary residence. Thanks for your question, Dee.

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