Fund Your Next Rental with Aspen Shadow
What is a DSCR Rental Loan?
Secure financing based on a property’s cash flow instead of personal income. DSCR loans allow buyers to qualify for a mortgage based on their rental property’s cash flow rather than their personal finances.
‘DSCR’ is short for Debt Service Coverage Ratio. This ratio helps us better understand and project your investor’s ability to pay back a loan based on revenue from the rent. Thus, our DSCR Rental Capital uses loan underwriting guidelines that review the property’s cash flow and is not based on the wages or personal income of the investor.
To determine the amount of the DSCR Rental Loan, our underwriters compare a given property’s rental income to the expenses of that particular property. Those expenses include not only the loan costs, but also the property taxes, insurance, and any applicable association costs. These are often referred to as the PITIA, which is short for Principal, Interest, Taxes, Insurance and Association costs.
From this income and cost information, we are able to determine the Debt Service Coverage Ratio, which is summarized as:
DSCR = P I T I A / Gross Rental Income
One additional item that your property investor needs to keep in mind about this calculation is that the focus is really on recurring income (ex, rent) and expenses (ex, loan costs). Unexpected expenses that can happen with investment properties are not factored into the DSCR calculation.
The loans that we originate typically have a DSCR of 1.0 meaning that the property cash flows just enough to cover Principal, Interest, Taxes and Insurance. A DSCR of 1.0 would mean that gross rents would equal $1,000/mo and expenses would also equal $1,000/mo. A DSCR of 1.25 would mean that gross rents would equal $1,250/mo with expenses of $1,000/mo.