DSCR Loan Requirements

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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Are you searching for a home loan product that doesn’t require tax returns to qualify? This isn’t uncommon if you’re a real estate investor seeking flexible mortgage solutions that don’t come with stringent eligibility criteria, extensive underwriting and drawn-out approvals.

A Debt Service Coverage Ratio (DSCR) loan could be a viable option worth considering. Read on to learn more about how they work and where to find these mortgage products. 

Traditional and NQ Mortgage Loans

 
Are you looking to finance a home too expensive for a conventional loan? An Angel Oak Jumbo Loan can provide financing for up to $3.5 million.

What is a Debt Service Coverage Ratio (DSCR) Loan?

A DSCR loan is a mortgage product that caters to real estate investors. It features a streamlined approval process that doesn’t involve traditional income verification. 

How DSCR Loans Work

It’s not uncommon for real estate investors to write off a sizable amount of expenses on their tax returns. However, this can be problematic when applying for a traditional mortgage as lenders generally use the net income of self-employed borrowers. But lenders offering these loan products focus on the DSCR instead of determining your eligibility for a mortgage. 

Do Banks Offer DSCR Loans?

Most DSCR loan programs are available through private lenders, like Angel Oak Home Loans. You can also consult with a mortgage broker to find other options that may be a good fit for you. 

What is the Debt Service Coverage Ratio?

The DSCR includes a property’s annual net operating income and mortgage debt (principal and interest). It’s used to gauge cash flow from a property and how much of the income can be allocated towards the monthly loan payment. 

How Do You Calculate for the DSCR?

You can calculate the DSCR on a property using this formula: 

Annual Gross Rental Income / Annual Debt Obligations (including principal, interest, homeowners’ insurance, taxes and homeowners’ association fees, if applicable) = DSCR

To illustrate, assume you’re looking to purchase a property that generates an annual gross rental income of $36,000. However, it also comes with $16,000 in annual debt obligations. Based on these figures, your DSCR will be 2.25. So, the property will earn 225 percent more income than what’s owed on outstanding debt obligations (including the loan and other related costs mentioned above).

Why the DSCR is Important

This figure provides insight into the likelihood of the real estate investor repaying the DSCR loan in full. DSCRs at or below 1.0 have a higher probability of fault as they indicate the borrower could potentially run into cash flow issues. 

What is a Good DSCR for a Loan?

Lenders generally like to see a DSCR of 1.25 or higher. If it’s lower, you could still be eligible for a mortgage but will typically receive a higher interest rate and be required to come to the closing table with more reserves. 

Traditional and NQ Mortgage Loans

 
Are you looking to finance a home too expensive for a conventional loan? An Angel Oak Jumbo Loan can provide financing for up to $3.5 million.

What Loans Can You Get If You Have a Low DSCR?

If your DSCR is on the lower end, here are some other funding options to consider. 

Asset-Based Loans 

As the name suggests, asset-based loans are granted based on the amount of assets you have at your disposal. Like DSCR, tax returns aren’t required to prove your eligibility for a loan. 

The Asset Qualifier Home Loan from Angel Oak Home Loans, a full-service mortgage lender, could be a viable option for you. Loan amounts of up to $3 million are available. To qualify, you’ll need at least $500,000 in assets post-closing, which could include stock, other investments and funds in a checking account, savings account or retirement account.

This loan product can be used to purchase a new property or to complete a rate-term or cash-out refinance. However, the property must be used as your primary residence. Furthermore, you’re not required to present income or employment information when you apply.

Inquire about the Qualifier Home Loan by using this online form found on Angel Oak Home Loans website

Bank Statement Loans

Bank statement loans are used by borrowers who’d prefer to provide personal or business bank statements in lieu of tax returns to substantiate their income.

Angel Oak Home Loans also features this loan product in its arsenal of mortgage offerings. Designed for self-employed borrowers with at least two years of experience, the Bank Statement Home Loan requires you to provide 12 or 24 months of personal or business bank statements when you apply. Or you can use 1099 income to qualify for a mortgage. 

Your transactions are then analyzed to determine a loan amount that works best for your financial situation. For example, you could be eligible for a Bank Statement Home Loan between $150,000 and $3 million and use it to purchase a primary home, second home or investment property. 

Contact Angel Oak Home Loans today to determine if you qualify for funding. 

But if neither of these options works for you, you could still be eligible for a mortgage. Another viable option for real estate investors is the Investor Cash Flow Loan. It also allows you to secure a mortgage of up to $1.5 million to purchase an investment property without providing tax returns or complex financial statements. Furthermore, there’s no limit on the number of properties you can purchase, and you’re allowed to place them in your LLC’s name. 

Complete this online form to learn more about other mortgage offerings available through Angel Oak Home Loans.

Angel Oak

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