DSCR Loans in Michigan

A DSCR loan is a mortgage designed for real estate investors.  Instead of qualifying primarily based on your personal income, the lender looks at the rental income the investment property is expected to generate and whether that income can support the property's mortgage payment and other required expenses

What is a DSCR Loan?

DSCR loans are generally used to finance investment properties that generate rental income.  Rather than qualifying primarily based on a borrower's personal income, the lender evaluates the property's expected rental income compared to its monthly expenses.

For real estate investors, this can be especially helpful when tax returns or traditional income documentation don't tell the full story.  Because qualification focuses more heavily on the property's rental income, a DSCR loan may provide an option for investors whose personal income documentation doesn't fit traditional mortgage guidelines.

What are the Benefits of a DSCR Loan?

DSCR Loans can offer several advantages for real estate investors:

• Qualification Based on the Property Cash Flow: Rather than relying primarily on personal income, qualification focuses on the rental income generated by the property.
• Less Reliance on Traditional Income Documentation: Depending on the loan program, borrowers may not need to qualify using traditional employment income, pay stubs, W-2s, or personal tax returns.
• Designed for Real Estate Investors: DSCR Financing can be used to purchase or refinance eligible investment properties that may be helpful for investors building or expanding a rental portfolio
• Options for Different Types of Investors: DSCR Loans may work for experienced investors as well as borrowers purchasing their first investment property, depending on program requirements.

How Does a DSCR Loan Work?

DSCR Loans focus primarily on the income generated by the investment property rather than the borrower's personal income.  The lender compares the property's qualifying rental income with the monthly housing expense to calculate its Debt Service Coverage Ratio (DSCR).

• Rental Income: The lender determines the property's qualifying rental income using documentation required by the specific loan program, which may include an appraisal and market rent analysis or existing lease.
• Housing Expense: The property's applicable monthly housing expenses are used to determine how much income is needed to support the loan.
• DSCR Calculation: The qualifying rental income is compared with the applicable housing expense to determine the property's DSCR.
• Loan Qualification: The required DSCR, down payment or equity, reserves, credit requirements, and other guidelines vary by loan program.

What Are the Requirements for a DSCR Loan in Michigan?

DSCR loan requirements vary by lender and loan program, but qualification generally focuses heavily on the investment property's ability to generate enough rental income to support its housing expense.  Depending on the program, lenders may consider the property's DSCR, down payment or available equity, credit history, cash reserves, property type, loan amount, and other qualification requirements.  Because DSCR programs are designed for investment properties, personal income documentation may not be evaluated in the same way it is for a traditional conventional mortgage.

At @Home Mortgage, we can review the property, your investment goals, and the available DSCR programs to help you understand the requirements that may apply to your situation.

What is a Good DSCR Ratio?

There isn't one DSCR ratio that works for every loan program.  In general, a DSCR of 1.00 means the property's qualifying rental income is equal to the applicable monthly housing expense.  A ratio above 1.00 indicates that the qualifying rental income exceeds that expense.  Some DSCR loan programs may allow ratios below 1.00, while others require a higher ratio.  The minimum requirement depends on the lender, loan, program, property, and other qualification factors.

How is DSCR Calculated for a Mortgage?

For residential DCSR Mortgage Programs, the basic concept is:

DSCR = Qualifying Monthly Rental Income / Applicable Monthly Housing Expense

For example, if a property has $2000 in qualifying monthly income and the applicable housing expense is $1600, the DSCR would be 1.25.  

The exact income and expenses used in the calculation can vary by loan program.  Depending on the program, the housing expense may include principal, interest, property taxes, homeowner's insurance, association dues, and other applicable expenses.

Considering a DSCR loan for an investment property in Michigan?  At @Home Mortgage, we can help you compare DSCR loan options, understand how the property's rental income may be evaluated, and determine what financing may fit into your investment goals..