How do the DSCR requirements work?

Question

I want to get into house hacking as soon as possible. Would it be smart to get a DSCR loan, or an FHA loan? I do not meet the requirements right now for an FHA loan, but from what I heard about the DSCR loan they don't look at your income, or credit score, instead they look at how much rent you will be making monthly. What else do they look at?

Abbey Humphreys · Answer

Hi - DSCR Loans do not work for house hacking because they strictly prohibit anyone from living in the property, have to be 100% investment properties only.

PS - check out all these helpful BP Articles on everything you need to know on DSCR Loans!

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Katherine Blazer · Answer

Hi Jacob, most DSCR loans are designed for investment purposes and not to be used as a primary. They use the rental income to offset the property's debt (mortgage, taxes, and insurance). So if you are using it for your primary you would be taking away that income. For FHA, you can actually use rental income to offset if you look at multi-doors, like a duplex, triplex, or quad, these are just a few things to consider.

Benjamin Sulka · Answer

Jacob,

DSCR loans typically require 20+% down and aren't for owner occ. I'm assuming since you wanted to put 3.5% down, you aren't in a financial situation to put down 20% on a property. I'm in the same situation as you and I don't have anywhere close to enough money to afford 20% and have money for repairs and reserves. It just isn't feasible.

I don't know how old you are but my advice would be to: Establish some income history, save up your money in a high yield savings account and NETWORK as much as you can in the meantime. Meet some mentors in your market and see if you can add value to their business. Also, stay active on BiggerPockets.

I'm 22 now and wanted to buy a property as soon as I graduated. Given the financial requirements to get pretty much any home loan, it wasn't possible for me. Real estate is a long term game to build financial wealth over time. Develop your strategy and don't try to rush into it if you don't have to.

My 2 cents as someone who is in a similar position.

Good luck!

Stacy Raskin · Answer

As others have mentioned, DSCR loans are only for investment properties, not owner occupants.

As far as how DSCR loans work: DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? Is your DSCR ratio greater than 1-meaning are you cash flowing. Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

This property cash flows.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Conner Olsen · Answer

FHA, DSCR isn't for owner occupants. And one perk of house hacking is putting little money down on an investment property. DSCR loans are 20%+ and FHA is 3.5%.

Ryan Thomson · Answer

@Jacob Brush DSCR loans are for investment properties usually. They have higher interest rates and often require 20+% down. This defeats the purpose of house hacking. I would consider a DSCR loan if you were not going to move into it.

I would continue to improve your income/credit or whatever is holding you back so that you can qualify for an FHA loan.

What's currently holding you back from qualifying? Maybe we can help with that?

Brittany Minocchi · Answer

What requirements don't you meet for FHA? DSCR wouldn't be an option for owner occupancy, that's strictly an investment product. There are nontraditional options for financing owner occupied properties, but you typically need good credit, lots of reserves and a decent down payment.

How do the DSCR requirements work?

How do the DSCR requirements work?

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