Should You Consider A DSCR Mortgage?
Posted on: 10 March 2023
A DSCR mortgage is a different kind of financial tool compared to a traditional and straightforward loan. DSCR stands for debt service coverage ratio. The idea is to provide loans to people based on their income-generation streams rather than their credit scores.
Is DSCR mortgage financing right for you, though? Here are the basics of what a DSCR mortgage loan is and how it might fit your goals.
Debt Service
The centerpiece of the DSCR model is the borrower's ability to service their total debt load. Debt service has value because it provides a different view of a person's ability to pay a loan back. If you're buying an investment property with the intent of renting units to residents, you can show how the rental units will generate an income stream. Someone seeking a second mortgage on such a property will even have receipts showing the payment history of the rental units.
Traditionally, mortgage decisions center on a consumer's credit score. A loan officer looks at the borrower's finances a bit, but mostly they want to examine the person's payment history. With a DSCR home loan, the bank focuses more on debt service. This may open up mortgages to more people, especially folks like full-time landlords or self-employed business owners whose income streams may vary. Particularly if you have multiple income streams, you'll probably find the DSCR model to be more welcoming.
Lower Interest Rates
Frequently, DSCR loans have lower interest rates. First, the bank has a clearer picture of the borrower's ability to pay because they're looking more closely at income streams and debt levels. Secondly, an income-generating property generally produces steadier payments than when a borrower depends on a paycheck from an employer. Finally, income-generating properties tend to make good collateral because the bank can take over the income stream in the event of a default.
Larger Loans
DSCR mortgage financing operates outside of traditional government-backed programs. Consequently, banks are open to larger loans in these cases. If you want to buy and renovate an apartment building, for example, that's not feasible under traditional models of home loans. Caps on most programs make it close to impossible to make this sort of arrangement work. In these cases, a DSCR mortgage often represents the most practical way to finance investment properties or commercial buildings.
Flexibility
The debt service model means there isn't a set payment amount. Each payment depends on the property's income stream, and this allows greater flexibility in making payments. Particularly if you might see seasonal fluctuations in income, this can help you control your cash flow.
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