Have you been contemplating buying a property with the intention of either reselling it, or renting it out as a profit, and want to know what your financing options are? When you invest in real estate, it can be an excellent way to earn some extra income, and there are several different types of options available to help an investor finance a real estate project. If you are located in the areas of Palm Beach, Tri-County, or Broward County, Florida, and have home financing questions, CTC Mortgage is here to help. Continue reading to learn more about the advantages and drawbacks of a DSCR loan.

What Are DSCR Loans?

A debt service coverage ratio loan, (or DSCR for short), helps a borrower finance an investment property by utilizing the funds from the rental instead of from a borrower’s personal income. Unlike a traditional mortgage, which requires a borrower to provide paperwork such as pay stubs, tax documents, W2s, etc. when applying for a loan, a DSCR loan allows a borrower to qualify for a mortgage without that documentation. Instead, in order to qualify for a DSCR loan, the rental income created by the property is required to meet or exceed the lender’s coverage ratio requirement. Lenders calculate the debt service coverage ratio, which helps to determine if the investment will generate adequate income to cover the amount of potential debt. Essentially, the higher this ratio is, the less risky the investment is for the lender.

What Are The Benefits Of A DSCR Loan?

There are several pros to obtaining a DSCR loan. First of all, a borrower’s personal income is not a significant indicator when applying for a mortgage, and there is no income check or personal income verification required. Additionally, DSCR loans can be closed and finalized in a quicker amount of time than traditional mortgages, and they have a higher certainty of closing because if the property meets the program guidelines, it will more than likely be funded. DSCR loans have higher loan-to-values, (LTVs), and there are no limits on the portfolio size; since the focus on this loan type is on the home’s income rather than a borrower’s personal income, an investor’s portfolio is able to increase more quickly, making a DSCR loan a competitive option compared to other loans, such as a hard money loan.

What Are The Potential Drawbacks of A DSCR Loan?

When deciding on a loan type that works best for you, it is also important to take into account the potential drawbacks of a DSCR loan. In certain circumstances, some lenders and brokers may be unable to correctly structure a DSCR loan, which could delay closing. DSCR loans do tend to have higher fees, require a higher down payment percentage, higher minimum credit scores, and higher interest rates, while having lower consumer protection. Even with these potential drawbacks, CTC Mortgage specializes in DSCR loans, and consistently close on these loan types in under 30 days. If you are interested in learning more about investing with a DSCR loan, contact CTC Mortgage today for a consultation. We specialize with these loan types, and with us, there will be no surprises.

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