Higher housing costs and interest rates are driving more and more consumers to the housing rental market.  For investors looking to profit from the growing demand for rental housing, one of the best options for purchasing a rental property is a Debt Service Coverage Ratio or “DSCR” loan. 

Demand for DSCR loans has surged as evidenced by the fact that half of all non-QM transactions rated by Standard & Poor’s in 2022 were DSCR loans, up from 22% the prior year.  Based on existing market conditions, DSCR loans are expected to remain a popular mortgage option for residential property investors.

DSCR loans allow investors to qualify for financing based on the income expected to be generated by the property rather than personal income.  Because DSCR loans do not require typical employment or income verification, they are ideal for investors who may have difficulty qualifying for a traditional mortgage loan.  Approval time may be shorter as well since there is no need for lenders to obtain tax returns and pay stubs.

Although DSCR loans are secured by residential property, they are typically not considered consumer or personal loans.  As a result, they do not have to abide by the majority of restrictions imposed on consumer purpose mortgages such as limitations on pre-payment penalties.  They are also not subject to the federal TRID disclosure requirement although some lenders choose to provide DSCR borrowers with a Loan Estimate and Closing Disclosure.

Many investors elect to form an LLC to purchase investment property in order to protect their personal assets.  The loan can then be structured with the LLC serving as both the title holder and the borrower or with the LLC acting solely as the title holder and an individual member of the LLC as the borrower.  Often when the borrower is an LLC, lenders will require a personal guarantor from at least one member of the LLC. Propel is now offering DSCR loan packages in all 50 states for lenders interested in entering this growing market.  For information on DSCR loans or any other Propel offering, please contact Franci Webster at fwebster@asurity.com.