DSCR Mortgage Loan in Southern California
The Debt Service Coverage Ratio (DSCR) home loan focuses on the income (cash flow) generated by the investment property itself. Conventional loans and other traditional home loans are heavily weighted by the borrower’s income and liabilities while the DSCR loan program is centered around the debt servicing itself.
If the rent received from the property including taxes, insurance and HOA (if applicable) covers the loan payment then the debt services itself. This home loan program is popular among real estate investors looking to expand their portfolio or the first-time investor.
This home loan program strictly looks at the net operating income (NOI) from the asset and not personal income to qualify for a mortgage. This is a Non-QM loan product and doesn’t require borrowers to meet the strict federal guidelines mandated by traditional mortgages. Property can be in an LLC, short-term rentals and condotels are allowed. A higher DSCR helps you qualify for loans and get a lower rate of interest.
How DSCR Loans Work in California
In California, the DSCR loan program operates similarly to other states but with some nuances tailored to the local real estate market. The core principle remains the same: the loan is evaluated based on the property’s net operating income (NOI) rather than the borrower’s personal income. This focus makes DSCR loans particularly attractive for real estate investors in high-demand areas like Los Angeles, San Francisco, San Diego, and Orange County.
Key Features of DSCR Loans in California
• Property-Based Qualification: DSCR loans in California focus on the rental income potential of the property. If the property’s income sufficiently covers the debt payments, it qualifies for the loan, regardless of the borrower’s personal income.
• Flexibility: These loans accommodate a range of property types, including single-family homes, multifamily units, short-term rentals, and commercial properties. Investors can also purchase properties under an LLC, which is a common practice in California for liability protection and tax advantages.
• Competitive Rates: While the interest rates for DSCR loans might be slightly higher than traditional loans, the benefits of easier qualification and faster approval processes often outweigh the costs. A higher DSCR ratio in California can help secure better rates, making investments more profitable.
DSCR Example
• If the property’s net operating income is $150,000 per year and the debt payments are $75,000 per year, then you have a 2.0 DSCR.
• If the property’s net operating income is $150,000 per year and the debt payments are $150,000 per year, then you have a 1.0 DSCR or breakeven.
Mortgage lenders typically want a DSCR ratio of 1.25% or better to ensure the mortgage payments will be covered even if unexpected expenses such as higher property taxes or operating expenses increase. Some lenders will go as low as .75% DSCR with compensating factors such as reserves and low loan to value (LTV).
Why The DSCR Home Loan?
The self-employed borrower and real estate investors often write off sizable expenses on their tax returns making it problematic when applying for a traditional mortgage. The DSCR loan program focuses on the property’s rental income potential instead of your personal financial situation.
DSCR Loan Requirements in California
To qualify for a DSCR loan in California, borrowers typically need:
• Credit rating of 660 or better.
• Max LTV 90%.
• Rental, investment, commercial and mixed-use property only.
• 20-25% down payment required for a purchase.
• Executed lease agreement.
• Professional Appraisal.
DSCR Refinance Options in California
California investors can also take advantage of various DSCR refinancing options:
• DSCR cash-out refinance: Investors looking to expand their real estate portfolio with a purchase will use their equity as a down payment on another DSCR loan. This allows you to leverage the equity gains and expand your portfolio faster.
• DSCR interest rate reduction: The Federal Reserve often lowers interest rates, or the borrower’s credit rating increases from the time the original loan was made. A DSCR loan refinance may lower the interest rate and reduce your monthly expenses.
• DSCR term refinance: Extending the term by adding more years to the loan can reduce your monthly mortgage payments and add to your monthly cash flow. This monthly savings could be substantial providing the downpayment needed for your next investment and DSCR home loan.
DSCR Bottom Line
This home loan provides flexibility with no personal income requirements, less paperwork, no penalty for tax write offs, fewer restrictions, and faster underwriting. The debt-to-income ratio factor is eliminated provided the asset meets the lenders debt service coverage ratio requirements.
Do I qualify for a DSCR Home Loan?
Contact your Arbor Home Loan expert for more information and a no hassle, no obligation, free DSCR home loan quote today!
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Copyright © Arbor Home Loans 2024. All Rights Reserved.
NMLS 1206543 & DRE 02128292
Arbor Financial Group. NMLS Entity ID #236669. DRE #01845041
Licensed In: CA, FL