All seasoned real estate investors need to take a serious look at the real estate investor mortgage. The real estate investor mortgage is also known as the debt service coverage ratio loan (DSCR).
What is a Debt Service Coverage Ratio Mortgage?
A DSCR mortgage is designed for seasoned real estate investors. A seasoned investor is generally defined as a client who can verify at least two full years of investment property ownership. In some cases, an exception can be made with just one year of rental property ownership.
What is the Benefit of a Real Estate Investor Mortgage?
The greatest benefit of a DSCR mortgage is the limited documentation that is required for approval. On the DSCR mortgage, there is no income verification and no maximum debt-to-income ratio. Documenting income as a real estate investor can be a tedious and frustrating process.
When a real estate investor tries to get approved for a full documentation mortgage, they are required to provide mountains of documentation. The required documentation can range from:
- pay stubs
- 2-3 years of W2s
- two years of complete personal federal tax returns
- two years of complete business returns
- two years of 1099’s and/or K1’s
- current lease agreements for all properties owned
- homeowners insurance declaration page for all properties owned
- mortgage statement for all properties owned
In some cases, there is additional documentation required. Not only does all of this documentation need to be provided, but underwriting will scrutinize every line of every document. If there are questions on any of the documentation, they may require written explanations from the client and the client’s CPA.
Less Documentation Required on a DSCR?
With the DSCR mortgage, there is no need for any of the above documentation. A no-income documentation loan will move through the process from start to finish much more quickly. A real estate investor will not only eliminate the gathering of all their income documents but will not have to answer endless follow-up questions from the underwriter.
Years of mortgage experience have shown me that all self-employed borrowers, real estate investors included, hate having to go to their CPA to ask for a letter. Many CPAs are hesitant to write a letter including information about the client’s business. Sometimes the CPA is willing to write the letter but may get put on the back burner during tax season. All of these delays cause the mortgage process to drag on. The longer the process drags on the more updated documentation would be required. This dragging out of the process also allows for more time for the lender to ask additional questions and the client may find themselves in an endless loop.
If No Income Documentation is Required, How Does the DSCR Mortgage Work?
The lender considers that a seasoned real estate investor has already shown that they can manage investment properties. In some sense, the lender looks at the rental properties for simply what they are – a business. If the monthly rental income is greater than the total monthly housing payment the property is a great long-term investment. In theory, the tennants would pay rent for 30 years and pay off the mortgage. Over that long 30-year window the property value will increase (although it could drop in the shorter term). In additon, rents will go up over those 30 years as well.