How to Get an Investor Loan Without Verifying Personal Income
Self-employed or unable to verify income? See how DSCR loans let real estate investors qualify using rental income instead of personal income.
Recent years have seen a boom in the residential real estate market, and investors are increasingly turning to buying properties as a source of cash flow.
If you're looking to build out your real estate investment portfolio, you know that securing financing can be one of the most difficult things to do, especially if you don't have traditional sources of income.
For borrowers who are self-employed or otherwise unable to verify their personal income with formal paperwork, don't worry! There are ways to get an investor loan without verifying personal income. Here's how:
What Is a Debt Service Coverage Mortgage?
A debt service coverage mortgage is a loan that uses a specific ratio that acts as a financial measurement used by lenders to determine a borrower's ability to repay a loan rather than your personal income.
It's more commonly referred to as a debt service coverage ratio (DSCR) loan.
A DSCR product can be an excellent option for self-employed borrowers or those who cannot verify their income using traditional documentation.
This is because lenders typically only require proof of the property's income to approve the loan. As long as the property generates enough income to cover the loan payments, the borrower may be able to get approved for financing.
These types of loans are best suited for those who:
- Have a hard time verifying their income
- Want to build a real estate portfolio
- Don't want to limit the number of properties they can own
How is a DSCR Calculated?
The ratio is calculated by dividing the borrower's net operating income by their total debt service.
A DSCR of 1 or higher means that the borrower is able to cover their debts with their income, while a DSCR of less than 1 means that the borrower is not generating enough income to cover their debts. This is the same underlying concept lenders use to evaluate investment property cash flow, applied here through a lender's own DSCR product rather than a standard agency loan.
Since the underwriting for these types of loans focuses strictly on the monthly income that is generated from the property, the monthly rent figure must first be calculated based on comparable rental properties in the area and signed off by an appraiser.
Once a monthly figure is determined, it is then divided by the total mortgage payment to determine the debt service coverage ratio.
For example, if a property is determined to generate $2,200 a month and the total mortgage payment, including principal, interest, taxes, and insurance, is $2,000, the debt service coverage would be 1.1 for that property.
What are the Requirements for a DSCR Loan?
DSCR loans are a non-agency, or non-QM, loan product, which means requirements are set by individual lenders rather than a single government or GSE standard. The CFPB describes non-qualified mortgages as loans that don't meet the standard "Qualified Mortgage" criteria, which is why underwriting rules for products like DSCR loans are set lender by lender instead of by a single agency standard. While specific requirements for borrowers may vary depending on your lender, common criteria for a DSCR mortgage loan can include:
- A minimum DSCR rating, commonly around 1
- A minimum credit score
- A down payment, often higher than what's typical for a conventional owner-occupied loan
- A specific amount of cash reserves
Because these thresholds vary by lender and by property type, it's worth confirming the exact numbers with your lender before applying.
What Property Types Can You Use DSCR Loans?
DSCR loans can be used for a variety of property types, including:
- Multi-family residential properties
- Commercial properties, including office buildings, retail spaces, etc.
- Mixed-use properties (contains both residential and commercial units)
- Single-family residential properties
It should be noted that each property type has its own set of requirements, and not every lender will allow you to use a DSCR loan for them.
Make sure to consult with your lender to find out which type of property you can use a DSCR loan for and the specific requirements.
How Does the Process Of Applying For a DSCR Loan Work?
As we mentioned before, the requirements and processes might vary slightly depending on your lender.
Here's how our process works at Modern Day Lending:
- Speak with one of our lending experts. We take pride in helping you understand the entire process and ensure this type of loan is best for you. We'll be there every step to answer any questions or concerns that may arise, so don't hesitate to reach out.
- Underwriting and appraisal. This is where we'll get into the details of your loan, including rates, fees, terms, and more. This is also where an appraiser will use comparable homes to estimate your rental income to sign off on your DSCR.
- Submit all your documentation. While you won't be required to submit personal income docs, you'll still need to submit traditional loan documents.
- Close and start renting. Once your loan is approved, you'll receive funds to purchase your property. Then, you're ready to start renting it out to your tenants.
If you're ready to take the next steps toward securing your next real estate investment, don't hesitate to reach out and see how we can help.
