What are Debt Service Coverage Ratio (DSCR) Loans?
Typical property loans, such as jumbo loans or other everyday mortgage products, are dependent on the borrower’s financials for approval. However, a DSCR loan in California is granted based on the specific property’s income potential rather than the borrower’s personal income. This makes it far easier to afford DSCR loans than traditional loans, especially for investment properties.
DSCR loans are ideal for California investors who are focused on positive cash flow for their properties. They might be the tools you need to acquire your next investment property and start generating income from rent.
What Does DSCR Measure?
DSCR stands for debt-service coverage ratio. The ratio compares a property's net operating income, otherwise known as rental income, to its total debt obligations. The higher the ratio is, the more likely DSCR lenders are to approve your application and provide the financing you need to purchase the property.
Net Operating Income (NOI) vs. Debt Service Obligations
NOI represents the money a property brings in after all operating expenses are paid. Those expenses include elements like utilities, property taxes, insurance, maintenance, and even staff salaries. All the revenue left over is considered the NOI, which can be measured monthly or annually. Debt service obligations include the mortgage, interest, and mortgage insurance.
Determining Your Property's Income-Generating Potential
A higher ratio means your property is more likely to generate profits. For example, if the annual NOI is $120,000 and the total annual debt is $100,000, the DSCR is 1.2. This shows that the property can generate some profits, but a higher number, like 1.5, would be better. Lenders have varying standards for approving DSCR loans in California, but most will prefer a ratio of at least 1.25.
DSCR Loans
California
Rental properties are a great way to generate income in the area of real estate investment. Whether you own a residential or commercial property, rental income from the tenants can cover the mortgage and operating expenses, leaving enough left over for some positive returns. However, purchasing an investment property is expensive, and prospective investors may not qualify for conventional loans of that size.
A Loan Product Designed for Investors
If you are interested in buying rental properties in California, you will likely need financing to do so. Rather than try to apply for a conventional loan or jumbo loan, you should consider a debt-service coverage ratio (DSCR) loan.
Why Choose DSCR Loans in California?
DSCR loans in California make investing much more accessible. Lenders focus more on the value of the property and its income than your personal finances, so getting started with a portfolio or building it out is within reach. Here are some of the advantages of a California DSCR loan.
Focus on Property Cash Flow, Not Personal Income
If you are interested in investing, then the property’s monthly cash flow is your primary concern. When you apply for a DSCR loan to finance the purchase, the lender’s focus is on that as well. No need to worry about your personal income. As long as you meet the minimum credit score, have a sizable down payment, and choose the right property, you can still be approved for a DSCR loan.
Easier Qualification for Investors With Multiple Properties
Real estate investors with multiple rental properties have an easier path to qualification for DSCR loans. Plus, income-generating properties make saving up for a down payment easier, so you’ll have an edge over new California investors when applying for additional DSCR loans.
Potential for Higher Loan Amounts
Conventional loans have limits that will impact the types of properties you can buy for your investment portfolio. The higher the property price, the stricter the standards for qualification will be. A DSCR loan in California increases your borrowing capacity so you can invest in all types of properties. With rising property values across the state, a higher maximum loan amount is crucial if you plan to invest in real estate.
Flexible Underwriting Guidelines
A DSCR loan is based on rental income, and as a result, lenders can be more flexible with their underwriting guidelines. Underwriting is the process of evaluating a borrower and determining if the loan should be granted, and lenders will be willing to work with you in the right circumstances, even if all their requirements are not met.
Quicker Closing Times Compared to Traditional Loans
The traditional mortgage process can drag on for weeks and even months. Lenders can typically move faster to close on DSCR loans, so you won’t have to wait around for a slow loan approval once the right property shows up on the real estate market.
California DSCR Loan Requirements
Not all California DSCR loans are the same. The primary differences will depend on the specific lender you choose to work with. However, there are some general DSCR loan requirements that you should understand before applying.
Minimum DSCR Ratio
Lenders want to know that a property is highly profitable and its rental income will efficiently cover all expenses and debts. For this reason, a DSCR mortgage is rarely approved for a ratio below 1.25. There are exceptions, of course, especially if you can afford a significant down payment.
Property Type
DSCR loans also depend on the type of property you want to buy. Some lenders will only offer DSCR loans on single-family residential properties, while others will include multi-family properties and commercial properties. Research what each lender can offer as you search for the right rental property.
Down Payment Requirements
Down payment requirements will vary from lender to lender. If you want to invest in real estate with a DSCR mortgage, the bare minimum is usually 20%. Some lenders may set minimums at 25% or higher to make the DSCR loans less risky. The more cash reserves you have, the easier it is to qualify for a DSCR loan program.
Appraisal and Inspection Requirements
Before you purchase property, it is essential to ensure you are getting a fair deal. Lenders have the same standards. As such, they will implement strict appraisals and inspections to evaluate the property in question and ensure it has a good chance of being profitable.
Understanding DSCR Calculation
When applying for a DSCR loan program, the lender will calculate your desired property’s DSCR by dividing NOI by the total debt obligations. If the resulting ratio is greater than 1, then the property is considered profitable. Here are a few examples of annual numbers for DSCR loans.
NOI=$80,000, Debt=$100,000, DSCR=.8
NOI=$150,000, Debt=$100,000, DSCR=1.5
NOI=$200,000, Debt=$100,000, DSCR=2
Net Operating Income and Total Debt Service
NOI is the difference between gross rental income and all operating expenses. It includes utilities, property taxes, rental insurance, maintenance, and other ongoing costs. In addition to the monthly rental income, other sources of property income could be included in NOI, such as parking fees or payment for laundry services. Total debt service consists of any property financing costs, such as principal, interest rate payments, and mortgage insurance.
Who Benefits From California DSCR Loans?
California DSCR loans are designed to help investors afford both long-term and short-term rental properties. Here are a few parties that benefit the most from a DSCR loan program.
Real Estate Investors
Real estate investors understand the merits of buying property and collecting income from those properties. DSCR loans are not available for primary residences, so they are ideal for buyers who are seeking additional revenue streams via the real estate market.
Self-Employed Borrowers
If you are self-employed, your income history may be inconsistent. Perhaps pay is not the same every month. This would typically deter lenders from approving traditional mortgages. Since a DSCR mortgage is based on the property’s income potential, your status as a self-employed worker will not impact your qualification.
Borrowers with Multiple Properties
DSCR loans in California are also ideal for those who already own at least one other rental property. The approval process is faster for previous borrowers, and it’s easier to purchase a second investment property with the profits from the first. This makes DSCR loans the perfect tools for growing your portfolio quickly.
The DSCR Loan Process
Applying for a California DSCR loan is simple with Pride Lending. Our team is dedicated to serving LGBTQ+ and minority borrowers who want to build their investment portfolios. By following the steps below, you will be on your way to acquiring a new property with a DSCR loan.
Choose the right lending partner – Your DSCR loan application starts with finding the right lender for your needs, and Pride Lending is ready to help you navigate the world of asset-based loans.
Apply for the loan – Our application process is simple and entirely online, so you can get started on qualifying for a DSCR loan in California right away. We have flexible underwriting guidelines to make pre-approval easier to achieve.
Calculate your DSCR – Once you have been pre-approved, you can start searching for properties with a strong DSCR ratio. Remember to calculate the DSCR for each property to evaluate its income potential.
Loan approval – When you are ready to make an offer on a property, our team will finalize the approval for your DSCR loan to prepare the funds for the purchase.
Closing day – Once the closing date arrives and all documents are signed, your California DSCR loan will allow the purchase to go through, granting you a new revenue stream.
Why Choose Pride Lending for Your California DSCR Loan?
DSCR loans in California are a specialty at Pride Lending. We can connect you with a loan office to help you get a DSCR loan for your desired property. Our application process is streamlined and a commitment to excellence is ingrained into everything we do. We pride ourselves on first-rate customer service to ensure investors are accomplishing their goals when they apply for DSCR loans.
Pride Lending also understands the complexities of the California market. Cities like San Diego, Los Angeles, and San Francisco provide excellent opportunities for investors, with average rental prices sitting above $3,000 per month [1].
Resources: [1] Redfin – California Rental Market,