If you are looking for a mortgage loan in Los Angeles, there is one type of loan that stands out from the rest. The DSCR Mortgage. This type of loan gives more benefits than other types and is worth considering if you’re in the market for a home mortgage. What exactly is this type of mortgage though? Read on to find out!
What Is a DSCR Mortgage?
A DSCR mortgage uses the profitability of the property based on rental income rather than the borrower’s personal income to qualify for the loan. Therefore, these loans are usually used for larger commercial investment properties. DSCR stands for debt service coverage ratio, which compares the income generated by the property to the debt obligation.
How Is DSCR Calculated?
The formula used to calculate DSCR is Net Operating Income/total debt obligations. For example, a property making $40,000 a year with $32,000 in annual debt payments would have a DSCR of 1.25. This ratio is important for both lenders and investors. It aids the lender in determining whether to approve the loan and indicates to the investor whether the property is likely to be a good investment. A DSCR of 1.0 is the breakeven point, where income and debt expense are equal. A DSCR above 1 indicates that the property generates enough cash flow to pay for the loan. A higher DSCR number is better than a lower one.
What Are the Requirements for a DSCR Loan in Los Angeles?
DSCR loans usually require a 20-25% down payment. Since these loans are not based on the borrower’s income and credit history, there are no credit score requirements. Lenders may set a required minimum DSCR. The exact ratio required can vary, but generally 1.25 or higher is considered a good DSCR.
What Are the Benefits of a DSCR Loan?
DSCR loans allow investors to qualify for a mortgage for property that generates significant rental income but may be more expensive than what the investor could qualify for based on personal income. A DSCR loan allows an investor to keep personal and business finances separated. The loans are based on the profitability of the investment and can be taken out under the business entity’s name rather than the borrower’s name. DSCR loans can also be a good option for borrowers who are self-employed or have employment gaps since these factors are not considered. Since they do not require income or employment verification, approval for DSCR loans can happen faster than for a traditional mortgage. A faster approval process can help investors compete for desirable properties with multiple offers.