DSCR Loans with BFT

What is a DSCR Loan?

• DSCR stands for Debt Service Coverage Ratio.
• A DSCR loan uses the income generated by a property (like rent) to determine if you qualify for a loan.
• Unlike traditional mortgage loans, your personal income or tax returns aren’t used to determine eligibility.
• This type of loan is specifically for real estate investors, not people looking to buy a home to live in.
• For example, if you’re self-employed and need a home loan, this wouldn’t be the right fit, but other loan options exist for you.

How Does It Work?

1. Lenders calculate the Debt Service Coverage Ratio (DSCR):

• They compare the property’s annual net income (after expenses) to the total yearly mortgage payments.
• Formula: DSCR=Property Net IncomeMortgage Payments\text{DSCR} = \frac{\text{Property Net Income}}{\text{Mortgage Payments}}DSCR=Mortgage PaymentsProperty Net Income​
• Example:
• If the property earns $15,000/year and mortgage payments are $12,000/year, DSCR = 15,00012,000=1.25\frac{15,000}{12,000} = 1.2512,00015,000​=1.25.
• This is considered good because it shows you can cover your mortgage and still have some income left.

1. Key Benchmark:

• Most lenders want a DSCR of 1.25 or higher. This means the property generates 25% more income than the debt costs.

Pros of DSCR Loans:

• No personal income verification: Ideal for investors whose tax returns don’t fully reflect their income (e.g., self-employed individuals or those with deductions).
• No limit on the number of loans: You can have multiple DSCR loans at once, helping you expand your property investments faster.
• Tailored to real estate investors: If rental properties are your primary income, this loan works better for your unique financial situation.

Cons of DSCR Loans:

• Higher costs:
• You might need a bigger down payment (e.g., 20-25% of the property price).
• Interest rates are usually higher than traditional home loans.
• More money upfront: Because of the larger down payment and interest, these loans can require more initial capital.
• Only for income-generating properties: This type of loan doesn’t work for personal home purchases.

Why Choose a DSCR Loan?

• If your rental income is your main source of earnings, DSCR loans let you qualify for financing even when tax filings don’t show high income.
• They’re flexible for building large property portfolios, provided you can maintain strong property income and DSCR for each loan.