What does DSCR stand for?
Debt Service Coverage Ratio is one of the ways lenders can evaluate whether you can repay a loan or not. Before calculating your DSCR, you need to have accurate information about your income and debts.
DSCR formula= Net operating income/ total debt service
What do you need to qualify for a DSCR?
These loans are good for investors, people who want to buy rental property or getting into the real estate investment side of things. Before qualifying the borrower, the lender will also require that you have a high FICO score whereby they will be able to determine your creditworthiness, at least 20% downpayment for property, and 6 months of reserves. The lender will also conduct a rental appraisal whereby they will send in a market appraiser to see what the current market rate is. As long as the estimated rent coming in is higher than the mortgage, you would qualify for a DSCR i.e. the property should produce enough income to cover the debt. With that said, it’s important to note that you don’t need income or a job, just 6 months reserve, and a down payment to qualify for a DSCR loan.
What is a good DSCR?
After calculating your debt service coverage ratio, you will be able to know the state of your financial health. In the case that your DSCR is high, the better because it indicates that you are making enough to pay your debts.
What are some of the ways you can use to increase your DSCR ratio?
Reduce your existing debt- calculate how much you already have in debts- mortgages or loan value. if you already have existing debt, start to pay off these debts before applying for a loan because this will affect your DSCR.
Increase your sources of income- you can do this by spending less so that you have more of your income left.
