What are Debt Service Coverage Ratio (DSCR) Loans?
DSCR loans utilize the Debt Service Coverage Ratio to identify whether a borrower’s property income can cover its debts.
Rather than using a borrower’s personal financial information like tax returns, bank statements, and pay stubs, DSCR lenders assess whether the subject property generates positive cash flow after its operating expenses and debt payments have been accounted for.
These unique qualification requirements make a DSCR mortgage loan a better option than other loan products, especially for investors whose main source of income is their property’s cash flow.
What Does DSCR Measure?
The Debt Service Coverage Ratio measures a property’s ability to generate income after covering its monthly mortgage payment and other expenses. This is done by dividing the net operating income (NOI) by debt service to create a ratio.
A positive ratio means positive cash flow, while a negative ratio means the property is losing money.
Net Operating Income (NOI) vs. Debt Service Obligations
Net operating income is the property’s rental income after all operating expenses have been removed. Some expenses included in NOI include maintenance, business loan repayment, property management company fees, repairs, and security.
Debt service refers to the expenses associated with owning the property itself, specifically loans and taxes. This number includes loan principal payments, interest payments, property taxes, homeowners insurance, and HOA dues.
In simple terms, NOI considers business expenses, while debt service considers property ownership expenses.
Determining Your Property's Income-Generating Potential
To assess the income potential of rental properties, you’ll take the NOI and divide it by debt service, which will yield a ratio. If you have a ratio below 1, this means that the property is not generating sufficient cash flow to cover its loan payments, while 1 means you are breaking even.
DSCR lenders typically want to see a ratio of 1.25 or higher, meaning that your property’s cash flow is 1.25 times its debt service
DSCR Loans
Ohio
Buy investment properties without personal income documentation using Ohio DSCR loans!
Unlike traditional home loans, DSCR loans use investment property cash flow rather than a borrower’s income to approve loans, making them perfect for investors and self-employed borrowers. These investment products have higher loan limits, more flexible underwriting requirements, and competitive interest rates.
Why Choose DSCR Loans in Ohio?
Ohio is fast becoming one of the hottest rental markets in the country; Cleveland, Columbus, and Cincinnati are three of the most promising cities for real estate investments in the United States.
For those seeking fortune in real estate, a DSCR loan in Ohio can make it easier than ever to get started.
Focus on Property Cash Flow, Not Personal Income
Real estate investors and self-employed borrowers often find it difficult to access conventional loans because of the strict underwriting requirements, including details about tax returns, pay stubs, and bank statements.
Unlike other loans, approval for DSCR loans is focused on how well rental properties can cover their debts rather than a borrower’s income. Most lenders only require a borrower’s credit score and proof of assets to cover a down payment, not exhaustive employment documentation.
Easier Qualification for Rental Property Investors
The lack of income verification can make it easier for real estate investors to qualify, particularly if most of their cash flow comes from rental income.
Your DSCR lender will be more interested in how the investment property covers loan payments and if the purchase price matches the market value. They do only a quick check of your credit score and look for proof that you can cover the down payment.
Potential for Higher Loan Amounts
In Ohio, the maximum conventional loan amount for single-family homes is only $766,550, even in high-cost areas. A real estate investor will be delighted to find out that DSCR lenders typically have a minimum loan amount instead of maximum loan limits.
This means you can access loans of $1 million or more, helping you stay competitive in areas with high property values.
Flexible Underwriting Guidelines
Because DSCR loans are non-QM mortgages, they are not restricted by the same strict underwriting guidelines as conventional mortgage products. This means that you can work with your DSCR lender to get advantageous loan terms.
Additionally, there are multiple ways to demonstrate the property’s income, whether that is previous lease agreements or market rent assessments.
Quicker Closing Times Compared to Traditional Loans
Because borrowers lack documentation, DSCR loans have a faster closing time; most of this time will be spent assessing the Debt Service Coverage Ratio rather than combing through your finances.
You can often receive a DSCR loan in weeks, not months, making it easier to secure rental property in highly competitive markets.
DSCR Loan Requirements
While DSCR loans are an exceptional way to purchase investment property in Ohio, they do have certain requirements. Additionally, DSCR loan interest rates are typically higher than for other mortgage products, and they have higher closing costs.
Before getting started on your DSCR loan application, make sure you meet these qualifications.
Minimum DSCR Ratio
The best DSCR lenders typically expect a Debt Service Coverage Ratio of 1.25. If your cash flow is lower than this, you may be able to find other DSCR lenders who will accept a ratio as low as 1, but this may come with a higher interest rate and a larger down payment.
Property Type
Only investment properties are eligible for these rental loans. Typically, these are residential rental properties like long-term rentals, vacation homes, and short—or mid-term rentals. Some specialized DSCR lenders will extend a loan for commercial properties like restaurants and hotels.
Minimum Down Payment
For most DSCR loans, the minimum down payment is 20%. A low loan-to-value ratio protects the lender, as these loans cannot be sold on the secondary mortgage market like other products.
Appraisal and Inspection Requirements
To get a DSCR loan in Ohio, your property will usually need to go through more than one appraisal; this ensures that the sales price matches the property value.
Lenders will also want an inspection to ensure that the rental property meets certain standards before approving a DSCR loan.
Understanding DSCR Calculation
The Debt Service Coverage Ratio (DSCR) is the ratio between your net operating income and your annual debt service. It identifies whether your rental property will make a profit after paying its operating expenses and debt service.
The DSCR is a reliable way for real estate investors and lenders to assess whether a property’s purchase price is justified by its positive rental income, as it considers most of the expenses required to run a rental at a profit.
Net Operating Income and Total Debt Service
Net Operating Income (NOI) is the profit you receive after subtracting the business expenses associated with running an investment property, such as maintenance, repairs, taxes, other business loans, property management, and security.
Debt service is the expenses associated with owning the property, which includes loan principal, interest payments, property taxes, insurance coverage, and HOA fees. When you divide NOI by debt service, you’ll receive a ratio of how much your income covers all the property’s debts.
For example, assume that you make $133,000 in rental income after all operating expenses have been accounted for, and your annual debt expenses are $106,000. This would give you a DSCR of 1.25, qualifying you for a DSCR loan.
Who Benefits From DSCR Loans in Ohio?
A DSCR loan is a versatile mortgage product that helps investors break into the Ohio real estate market, which has grown by over 5% year-over-year. The lack of income verification and the flexible underwriting make it a suitable loan option for many applicants, including the following.
Real Estate Investors
Ohio real estate investors appreciate that DSCR loans consider the property’s ability to generate income rather than personal finances. This makes it easier to access funding, and it also means that they can keep their finances separate from their business transactions, providing greater protection for their assets.
Self-Employed Borrowers
An Ohio DSCR loan is an excellent option for self-employed individuals who may struggle to access other loan products due to the need for extensive income documentation. Most conventional lenders expect details such as tax returns, banking statements, and employment information, which freelancers and entrepreneurs may not have.
With a DSCR loan, all that’s necessary is a credit score and evidence of sufficient assets to cover the upfront expenses, as most of the approval process is oriented toward the property rather than the borrower.
Borrowers with Multiple Properties
Serious investors seek to expand their portfolio as quickly as possible, garnering rental income from numerous properties, but this can be hard to achieve with the typical loan process. Conventional mortgages have slow approval times, and they are usually only underwritten for one property at a time.
By working with a DSCR lender, investors can combine multiple properties into a single loan, making it easier to finance their dreams and manage their monthly payments.
The DSCR Loan Process
Pride Lending will match you to a leading DSCR lender and help you throughout the application process, ensuring that you have all that you need to succeed. The typical loan process includes the following:
Find a Lender - These real estate mortgages are specialized products available only through select lenders. Do your research carefully to ensure that your loan servicer matches your needs.
Get Pre-Approved - The pre-approval process for a DSCR loan involves a credit check and asset verification before proceeding to property details.
Shop for Property – Work with a commercial realtor familiar with the Ohio investment market for the best results.
Calculate DSCR – Using market details, ensure that your property generates sufficient cash flow to cover its debt.
Application - When you apply, the lender will order an appraisal and inspection and review the DSCR.
Underwriting – During underwriting, a mortgage professional double-checks all of the information and may ask for additional details.
Approval – Once you’ve signed all the paperwork, the rental property is officially yours!
Why Choose Pride Lending for Your Ohio DSCR Loan?
Pride Lending is the first mortgage company built on a commitment to the LGBTQ community. With our experience in Ohio DSCR loans, we seek to help investors and entrepreneurs access the funding they need to achieve their dreams.
We’ll match you to the right lenders for your needs and help you throughout the life of your loan, whether that’s seeking a cash-out refinance or changing your terms. Our team has years of experience in these special investment products and can answer any questions you may have about investing in Ohio.