Overview
A DSCR (Debt Service Coverage Ratio) mortgage loan, also known as a commercial real estate loan, is a type of loan primarily used for income producing properties such as commercial real estate, multifamily properties, or investment properties. Unlike residential mortgages that are based on the borrower’s personal income and creditworthiness, DSCR loans focus on the
property’s income and ability to generate cash flow to cover the loan payments.
These loans provide an opportunity to leverage the property’s cash flow potential and generate returns on investment. However, borrowers should carefully evaluate the property’s income and expenses, as well as the associated risks, before obtaining a DSCR mortgage loan.
Income Qualification
Lenders evaluate the property's income and cash flow
potential rather than the borrower's personal income or credit history. It requires
a rent schedule appraisal to evaluate the rental income.
Debt Service Coverage Ratio
The Debt Service Coverage Ratio (DSCR) is a
critical metric used by lenders to assess the property's ability to generate enough
income to cover the mortgage payments. It is calculated by dividing the
property's net operating income (NOI) by its total debt service (principal and
interest payments). Lenders typically require a minimum DSCR ratio to qualify for
the loan, often around 0.80 to 1.25.
Down Payment
Lenders typically require down payments ranging from 30% or
more, depending on the property type and the lender's requirements. In a case
where the rent does not cover mortgage payment, lender will require more down
payment to lower the mortgage payment and keep the DSCR ratio between 0.80
to 1.25.
Credit Score
While credit requirements can vary among lenders, borrowers typically need to have a good credit score to qualify for a DSCR mortgage loan. The minimum credit score required is 620.
