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Investor and self-employed

DSCR is the loan for an investor whose rental can carry its own payment, qualified on the rent rather than on tax returns

A DSCR loan, named for the debt service coverage ratio, is a business-purpose mortgage on a rental property you do not live in, qualified on the property's rent measured against its own payment, taxes, insurance and dues rather than on your personal income. We place them on rentals in San Luis Obispo County and on the Central Coast. A DSCR lender reads the rent rather than your tax returns or pay stubs, which is the point of the product, and sets its own rules on credit, reserves and price.

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The program in one box

What it is
A business-purpose mortgage on a rental property you do not live in, qualified on the property's rent set against its own payment, taxes, insurance and dues. DSCR stands for debt service coverage ratio: how the rent measures up to what the property costs to carry.
Who it suits
An investor buying or refinancing a rental that carries itself, whose tax returns understate what they earn or are spread across too many entities to document quickly, or who has a reason to keep the returns out of it and accepts paying more for that.
How it is qualified
On the property. The rent, from the lease in place or from the market rent on the appraiser's comparable rent schedule, is set against the full monthly payment with property taxes, insurance and association dues. How far the rent has to clear the payment is each lender's rule.
The property
A residential rental of one to four units that you do not live in, bought or refinanced, including a cash-out refinance of one you already own. A larger apartment building is a commercial loan, not this.
The paperwork
A credit pull, reserves after closing, the lease or rent schedule, proof of funds and the entity documents if an LLC is borrowing, but not tax returns or pay stubs.
Who borrows
You, or an entity you own. We arrange DSCR loans to an LLC that holds title, and the lender may ask the members to stand behind it personally.
What it costs
Set by each lender, and it can include a higher rate than a conventional loan on the same property, points, and a prepayment penalty for paying it off early. None of those is priced here, because each is set loan by loan and changes without notice.
Where it is not the answer
A home you will live in. Buying a home of one or two units to live in is a consumer loan, qualified on your income or assets. And a rental whose rent does not cover its payment: then a conventional loan with full income documentation, or more equity up front so that a smaller payment fits the rent.

What this program is good at

  • The rent qualifies the loan, so a rental that carries itself can be bought or refinanced without reopening your tax returns, your business's returns or the entities behind them.
  • A purchase or a refinance, including cash out of a rental you already own, which is how one property's equity becomes the next property's purchase.
  • The loan can be made to an LLC that holds the property.
  • Credit still counts and still sets the terms, but a thin year on the tax return does not decide the file, because the file is not read that way.

Who qualifies

What a lender weighs before this program is on the table. A lender can add rules of its own, and those rules can differ from one lender to the next.

The property's rent

The lender takes the rent, from the lease in place or from the market rent on the appraiser's comparable rent schedule, and sets it against the full monthly payment with property taxes, insurance and any association dues. Each lender sets how far the rent has to clear that payment. Where each lender draws its line is the lender's rule and it changes without notice.

Why the rules allow it

A loan to buy, improve or carry a rental you will not occupy for more than fourteen days in the coming year is credit for a business purpose under Regulation Z, the federal truth-in-lending rule, and so is a refinance of one when the money goes back into the rental or the next one. Business-purpose credit sits outside that rule, including the ability-to-repay requirement that makes a lender verify your income on a loan for your own home. Cash pulled out of a rental and spent on yourself is a consumer purpose, the rule follows the money rather than the property, and a lender may ask you to state in writing what the money is for. That exemption is the legal fact that lets a DSCR lender qualify the property instead of you. It cuts the other way too: the federal consumer disclosures a home loan carries are not required on a business-purpose loan, so read the note and the prepayment terms closely before you sign. Occupancy is sworn in writing. A DSCR loan on a home you intend to live in is mortgage fraud, not a workaround.

Credit and reserves

Credit is pulled. Where your score sits changes the rate, the equity asked of you up front and which lenders will take the file, and some lenders close the product off below their own floor. Reserves after closing are required and are measured in months of the property's payment; how many months is the lender's rule. Tell us what you will have left after closing, not only what you will spend.

Who the borrower is

You personally, or an entity you own. We arrange DSCR loans to an LLC that holds title, and the lender may ask for its formation documents and operating agreement and for the members to stand behind the loan personally. Whether you must have owned a rental before is each lender's rule. Funds for the purchase and the reserves have to be yours and traceable, the same as on any mortgage.

Where it is not the answer

A home of one or two units you will live in: buying one is a consumer loan, qualified on your income or assets, through a conventional or FHA loan. A rental whose rent does not cover its payment: a conventional investor loan with full income documentation, where your own income carries the shortfall, or more equity up front so that the rent does. And an investor whose tax returns already qualify for a conventional loan on the rental, because a conventional loan can cost less when it is open to you.

How it works with us

What happens once you get in touch

The steps in order, so you can see what is coming. Nothing here is underwritten until a lender underwrites it.

  1. Tell us about the property, not about your income

    The address, the rent in place or the rent you expect, what the taxes, insurance and dues run, and what you want to borrow.

  2. We pull credit and ask about reserves

    With your permission we pull credit and ask about reserves, the properties you already hold, and whether an LLC will hold title.

  3. Your loan officer reviews the file

    If the file supports one, your loan officer can write a pre-qualification letter.

  4. Appraisal, rent schedule, underwriting and funding

    The appraiser values the property and completes the rent schedule the ratio is read from, and the lender underwrites the property, the entity and the reserves.

What people ask about this program

If yours is not here, call us. The useful answer depends on your file.

What is a DSCR loan?

A DSCR loan is a mortgage on a rental property you do not live in, qualified on the property's rent measured against its own payment, taxes, insurance and dues rather than on your personal income. DSCR stands for debt service coverage ratio, which is how the rent compares with what the property costs to carry each month. The lender reads the rent rather than your tax returns or pay stubs, and sets its own rules on credit, reserves after closing and price.

Does a DSCR loan require tax returns?

Not as a rule of the product. The property's rent qualifies the loan rather than your tax returns and pay stubs, though each lender sets its own document list. A credit pull, the lease or the appraiser's rent schedule, reserves after closing, proof of where your funds come from, and the entity documents if an LLC is borrowing all are. A DSCR loan is lighter on paper, not light, and it can cost more than a loan qualified the ordinary way.

Can I get a DSCR loan on a home I plan to live in?

No. A DSCR loan is a business-purpose loan on a rental you do not occupy, and that business purpose is what places it outside the federal ability-to-repay rule, which requires a lender to verify a borrower's income on a loan for the borrower's own home. A home of one or two units you will live in has to be qualified on your income or assets, through a conventional, FHA or similar program, and occupancy is sworn in writing. Misstating it is mortgage fraud, not a workaround.

Can a DSCR loan be made to my LLC?

Yes. We arrange DSCR loans to a limited liability company that holds title to the rental, and the lender may ask for the entity's formation documents and operating agreement, with the members standing behind the loan personally. The terms are the lender's.

Does a DSCR loan have a prepayment penalty?

It can. A DSCR lender may include a prepayment penalty for a set period after closing, and selling or refinancing the property inside that period then costs money. Whether there is one, and its shape and length, are each lender's terms. It is the term to read most carefully before you sign, and a loan officer should put it in front of you with the rate, not after.

Investor and self-employed

Bank statement loan

Income read from your bank deposits instead of your tax returns, for the self-employed whose returns understate what they take home.

  • Your deposits are what the lender reads, rather than the figure left on the return after every legitimate write-off has been taken.
  • It is a loan on the home you live in, with the same federal ability-to-repay protection as any other consumer mortgage.
  • Federal rules do not permit a prepayment penalty on a loan like this written outside the qualified-mortgage definition, so if a cleaner return later qualifies you for a conventional loan, you could refinance without a penalty for leaving, though the refinance has closing costs of its own.
More about Bank statement

Investor and self-employed

Non-QM loan

For a borrower who can repay but whose income, credit history or property does not fit agency rules. Costs more than an agency loan.

  • Bank statements, assets, a recent credit event, a foreign national's file, an unusual property: each is a reason agency rules say no, and a non-QM lender applies its own guidelines instead. We arrange non-QM loans for each of these reasons.
  • The lender still verifies that you can repay. That protects you as much as it binds them, and it is what makes a non-QM loan a mortgage rather than a bet.
  • On a non-QM loan for a home you live in, the federal rule bars a prepayment penalty, so leaving it for an agency loan later carries no penalty.
More about Non-QM

Not government-insured

Conventional loan

A loan for solid credit and income, with private mortgage insurance that does not have to be permanent.

  • Private mortgage insurance does not have to be permanent. On a one-unit home you live in, the Homeowners Protection Act of 1998, subject to its conditions and exceptions, gives you the right to ask for borrower-paid mortgage insurance to come off once the loan is paid down far enough against the home's original value, and requires it to end automatically at a later point on the loan's amortization schedule.
  • It works for a primary residence or an investment property of one to four units, and for a one-unit second home. FHA and VA are built for a home you live in; FHA allows a second home only in narrow hardship cases.
  • There is no federal credit floor on a conventional loan, and Fannie Mae's Desktop Underwriter sets no minimum score of its own: it weighs the credit with its own risk factors and returns what the file needs.
More about Conventional

Where this program fits:Buying a homeRefinancingThe county's loan limitsThe Central CoastServices

Side by side:DSCR vs conventionalDSCR vs bank statement

Where it comes up in the county:San Luis ObispoPaso RoblesLos OsosCambriaArroyo GrandeGrover BeachSanta MariaOrcuttLompoc

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California Mortgage Solutions Inc. · Company NMLS #325189

This page is general information about a loan program, not an offer of credit or a commitment to lend. What a lender will do with your file depends on the file.

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