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Posted over 1 year ago

How can I invest in real estate when my income is holding me back?

That’s a great question! With the economy and market in for some twists and turns soon, I do get questions like these. Some investors see the future as an opportunity while others are willing to wait it out. It depends on what you are trying to do.

According to ApartmentList.com Orlando rents have declined 0.9% over the past month, but are up sharply by 10.2% in comparison to the same time last year. Orlando sits at $1,680 for a 2/2, while Lake Mary hovers at $2,160. Of course, there are many different factors as to why a property would rent for a certain amount. Location, safety, size of space, whether it’s remodeled recently or not, parking situations, and so forth. I say all this because there is an opportunity for investors to capitalize on the increasing rent. While rates are high, so is rent.

You may find yourself looking for an opportunity to invest but don’t have the income, or perhaps you do make the necessary income but are self employed as of recent and don’t have the traditional two-year tax returns to prove that. Or perhaps you are a real estate agent with saved up capital and want to invest. Here is a great option – The Debt Service Coverage Ratio loan (DSCR).

The DSCR loan is a simpler, quicker way of securing financing for investors who can’t use the traditional route. You will not be required to prove income, that means there is no DTI. Loan officers won’t ask for your W2’s, tax returns or paystubs. This eliminates the need for full documentation. Instead, the loan is based off three main things. The first is your credit score, you must have a decent score, typically the lowest is 640. The lower the credit score the higher the down payment, which is the second portion of this loan. Generally, you’ll see at least 20% down, but depending on certain factors (credit score mainly) that number can increase to 35%.

The third portion of determining the loan is the DSCR itself…The amount of coverage the rent supplies for the debt. What I mean by this is how much of the fair market rent covers the mortgage. For example, if you find a home that has a mortgage of $1,000 a month and you can rent that property out for $1,000 a month the ratio is 1.00. If you could rent that same property out for $1,250 a month the ratio is 1.250. The larger the ratio the better. It’s even possible to secure a loan with a ratio below 1, say around 0.75… but then again why would you want a property with negative cashflow?

The fair market rent value is simple to determine for the lender. Along with the traditional 1004 appraisal you’ll also be required to get the 1007 rent schedule. This determines the fair market rent value, or the total amount you can rent the home for. Easy as that!

Beyond these 3 main requirements there are other things to consider. You may be required to own your own property, funds for down payments need to be documented or seasoned, minimum loan amounts, possible prepayment penalties and so forth. Did I mention this works as a REFI also?


Comments (2)

  1. That's interesting! I hadn't heard of the DSCR loan before. 


    1. Yeah it is a great loan product that has saved a lot of investors. Glad you read my article! Cheers!