Home » Resources » Blog » What is a Debt-Service Coverage Ratio Loan—and Do You Need One?

What is a Debt-Service Coverage Ratio Loan—and Do You Need One?

Not all mortgages are created equally—and if you’re an investor looking to turn a profit on a property, a traditional mortgage might not make the most sense. That’s why we also offer debt-service coverage, or DSCR, loans here at Quontic, which are specifically designed with the needs of investors and landlords in mind. 

A DSCR loan makes it possible to borrow money to buy a property without providing proof of personal income. Instead, you’ll rely on your property’s potential cash flow to close the deal. Here’s a deep dive into what you need to know about DSCR loans, including how they work, who they’re for, what their benefits are, and how to qualify for one.

What is a Debt-Service Coverage Ratio (DSCR) loan?

A debt-service coverage ratio, or DSCR, loan, is one that allows a borrower to qualify based on cash flow rather than income. In other words, a DSCR home loan is a non-qualified mortgage (non-QM) that can make eligibility easier for investors, entrepreneurs, and other non-traditional borrowers.

A DSCR is, as its name suggests, based on the borrower’s debt-service coverage ratio. That ratio is calculated by dividing a business’s operating income by its debt obligations and liabilities. 

So what does that mean for a home investor?

If you’re purchasing a rental property, your operating income is rent: the money your tenants pay you to occupy the property. The debt, of course, is the loan itself: the money you’re borrowing to purchase the home and which you’ll need to repay to the lender, including both the principal amount and interest charges. (Note: when Quontic calculates your DSCR, we’ll subtract real estate taxes, insurance costs, and HOA fees from your gross rental income.) 

A DSCR uses this calculation to help qualify you for a mortgage, along with your credit history and a required minimum down payment. In other words, it helps keep an investment purchase in the realm of a business expense—and income generator—versus a personal one.

How is a DSCR loan different from other mortgages?

Most mortgages are built for people who are purchasing a home to live in, whereas a DSCR is designed specifically for investors. As a result, conventional mortgages—as well as government-insured mortgage programs like FHA loans, VA loans, and USDA loans—require the borrower to provide proof of personal income and cash flow. After all, housing is one of the biggest line items in most personal budgets.

To qualify for a traditional mortgage, you’ll need to provide a variety of financial information and paperwork including tax returns, pay stubs, bank statements, and more. Your underwriter will also review your credit report and verify your employment history. With a DSCR loan, what matters most is the debt-service coverage ratio itself: that figure that’s calculated, as we mentioned above, by dividing the property’s rental income over the proposed loan amount. (A credit check, however, is still required.)

Who can use a DSCR loan?

Although the most obvious answer to this question is “real estate investors,” DSCRs can actually benefit a wide array of borrowers. For example, at Quontic, you could qualify for a DSCR loan even if you’re a first-time home buyer.

A DSCR loan could also be a good option if you’re a seasoned investor looking to add a new property (or properties) to your portfolio, a self-employed borrower with multiple businesses, an entrepreneur, or retired. So long as you’re planning to earn rental income from your property, a DSCR loan could be right for you.

But what kinds of properties qualify?

We built our DSCR loan with flexibility in mind—so many different property types are eligible for purchase with it. Single-family homes, two- and four-family units, planned unit developments (PUDs), condos, and condotels are all eligible for purchase with a DSCR loan, which gives an investor plenty of different opportunities and options when it comes to starting, building, and scaling their business.

What are the benefits of a DSCR loan?

Because many self-employed borrowers, landlords, property investors, and other entrepreneurs write off many expenses, their tax returns can sometimes show less available cash than they actually have on hand to make monthly payments. A DSCR makes it possible—and even simple—to get qualified for a mortgage even if you don’t have tax returns that show a lot of income. 

Obviously, this works well for retired buyers, as well, who are usually on a fixed income or drawing from existing retirement funds. With a DSCR, what matters most is how much money the property itself stands to make in rental income.

But there are other benefits, too.

With Quontic’s DSCR, specifically, up to 100% of your down payment and closing costs can consist of gift funds. In addition, we’re one of the few lenders that offer DSCRs to first-time investors, even if they’re also first-time buyers. And, as mentioned, you can qualify using just the income generated by the investment property. That means you won’t have to worry about producing tax returns, paystubs, and other forms of personal income verification.

How could a first-time home-buyer use a DSCR loan?

Simple: if a first-time investor is also a first-time home buyer, they can still qualify for a DSCR loan—so long as the rental income they stand to make from the property is sufficient to repay the debt. 

Perhaps you’re planning to stay in your rental property, a family’s property, or elsewhere while you rent out your first home to pay it off. Maybe you’re a foreign national purchasing a property in the United States as a real estate investment. In any case, a DSCR loan could help you make your long-term financial goals a reality, 

How do you qualify for a DSCR loan?

As with a traditional mortgage, a DSCR loan does come with qualification requirements—they’re just different.

To qualify for Quontic’s DSCR loan, you’ll need a credit score of 680 or higher, a down payment of at least 25% of the property’s purchase price, and a DSCR of 1.00x or higher. (That is to say: you must be able to prove you’ll make enough money from your rental to pay back the loan.) The maximum loan amount we offer is $2,000,000 for this loan type.

We can also help you out if you’re looking for a different type of mortgage loan, such as a conventional loan (governed by guidelines set by Sallie Mae and Freddie Mac), an FHA loan, or a VA loan. We’re also one of the few mortgage brokers who offer Community Development Loans, or CDLs, specifically geared toward non-traditional borrowers; although you’ll still need to prove your personal income, the application process makes it possible to qualify even if you don’t work a W-2 job for wages or a salary. We offer competitive interest rates and also work with property owners looking to refinance.

Need more information customized to your financial situation? Our mortgage specialists are standing by to help—reach out today.

Be the first to know

Email Address

Table of Contents