DSCR Loan: How to Become a Homeowner
Homeownership has seen a huge spike since after the pandemic. It’s all attributed to people trying to move out from popular cities that they consider clustered to less clustered areas.
Intending homeowners are exploring possible ways to acquire these properties, with most of them relying on mortgages. This form of purchase is useful for some intending homeowners, however, for others , the mortgage programs haven’t been entirely helpful.
A stress-free answer to this popular question “how to become a homeowner” through loans is the debt service coverage ratio loan.
With the Debt Service Coverage Ratio (DSCR) loan, your dream of owning a home is possible, regardless of your financial status. Wondering how to become a homeowner through the DSCR loan? Read to the end!
What Are DSCR Loans?
The Debt Service Coverage Ratio loan is a mortgage program that grants you access to a loan without depending on your income as a borrower.
Unlike the usual mortgage program, they don’t expect you to pay back the loan through your income, instead, they rely on the revenue the house generates.
How Does a DSCR Loan Work?
As earlier stated, the Debt Service Coverage Ratio loan doesn’t rely on your borrower income, they rely on the profitability of your rental property.
To access the loan, the lenders will take a look at the net operating income (NOI) forecast of the property you wish to invest in, then divide it by the debt service of the loan to get the coverage ratio of the debt.
For instance, if the net operating income of the rental property is $160,000 monthly and the debt service requirement of the building is $25,000 monthly, the coverage ratio will be 160,000÷25,000=6.4.
The result above means that you can pay for the debt service six times in a month, and can cover the debt amount through the rental property.
For most lenders, the acceptable coverage ratio for loans falls between 1.25 to 1.5, with 1.0 being the minimum in the program. You can get more information on the minimum coverage ratio at the DSCR loan page of the lender.
Pros and Cons of DSCR
The DSCR loan answers the “how to become a homeowner” question of every intending homeowner. DSCR nevertheless, comes with its pros and cons.
Pros of the DSCR Loan
- Personal Income Isn’t a Requirement
The main appeals of intending borrowers for the loan program, is the absence of personal financial documents as a requirement.
Lenders under this loan program don’t require you to be employed nor do they ask for your financial documents.
- Faster Closing Time
When you apply for mortgage loans, the lenders take time to process and go through all the financial documents you submitted. Lenders check your accounts and your recent employment history, which take days and weeks to finalize.
- No Limit on Number of Properties
Most loan programs don’t allow borrowers to take a loan for another property until they pay for the initial loan. Unlike DSCR programs which allow borrowers to take out multiple loans at a time for different properties.
- Property Eligibility
DSCR lenders are known to permit numerous types of properties, unlike the usual mortgage loans. Also, they allow limited liability companies to own properties.
Cons of the DSCR Loan
- Limited Finance for Borrowers
Although you’re allowed to acquire multiple properties, most of the lenders have a cap on the limit they can give a borrower which falls less than mortgage loans. For most, it falls between $5,000,000 to $6,000,000.
- Unfavorable Terms
Besides the 20% to 25% of the total loan required as the down payment, lenders need to pay a service fee for the loan. This fee ranges from 0.5% to 1% of the total loan.
Requirements for Applying for the DSCR Loan
The following are some of the requirements for applying for the DSCR loan:
- Coverage Ratio
The loan program is solely based on this coverage ratio. Therefore, every intending borrower must meet at least the minimum of the lender which can be confirmed with the lender.
- Down Payment
Intending homeowners using the loan program are expected to have a particular percentage of the total loan ready as a down payment to the lender before they can access the loan. This normally falls between 20% to 25% of the total loan.
- Property Eligibility
Although the DSCR loan is known to accommodate more buildings than the standard mortgage loan. It’s still important to ensure that the particular building you want to invest in is approved by the lender.
FAQs
Can You Buy a House Without a Job Through the DSCR Loan?
This question is crucial for intending homeowners looking to access the loan program to boost their portfolio.
Unlike the usual mortgage program, the DSCR loan doesn’t see your income or employment as a requirement for approving your loan. Therefore, even if the borrower is jobless, they can still access the loan, so far the forecasted net operating income of the property can service the loan.
Is Getting a DSCR Loan a Difficult Exercise?
Getting a loan is a fast and smooth exercise. They don’t depend on your financial documentation, hence, the approval goes smoothly once conditions are met.
Can You Get a Loan for a Down Payment on a DSCR Program?
Lenders on loan programs always require a down payment of 20% to 25%. That might be difficult for most borrowers to afford, with some of them turning towards loans to afford the down payment.
This option can be risky as you will just end up piling loans over loans. Instead, saving towards these down payments is advised for intending homeowners/ real estate owners.
Conclusion
If you’ve been wondering how to become a homeowner without much funds, you already have your answer. The Debt Service Coverage Ratio serves as the best means to penetrate the real estate market with less risk. It provides lots of cushion for newbies to the real estate world and also for investors’ experience in real estate.
It’s important to be careful when applying for these loans, though they look almost perfect.
