What Are the Advantages of No DSCR Loans?

One of the biggest elements in short-term rental property investing is financing, but it is not always easy to get.

Most large lenders view short-term rental properties as risky propositions compared to primary residences, which often means tighter restrictions and harsher eligibility requirements. In other words, it might be that much harder to secure a loan for your investment property if you cannot pass specific financial metrics.

Fortunately, you have other options, such as No Debt Service Coverage Ratio (DSCR) loans.

The advantages of No DSR Loans include doing away with the financial metrics that might disqualify a would-be rental property investor from traditional commercial bank loans.

Commercial banks are not the only game in town, and non-bank lenders such as Vacation Rental Loans look beyond the numbers.

What Financial Metrics are Important to Commercial Banks?

Debt Service Coverage Ratio (DSCR)

The DSCR is a measurement that predicts whether a given investment will generate enough income to cover repayments on the loan used to secure that investment.

The ratio is equal to your investment’s net operating income (or income minus operating expenses) divided by the loan’s total debt service.

A DSCR ratio of 1.0, often referred to as the “breakeven point,” indicates that the investment will produce cash flows that match the proposed debt obligation.

A DSCR ratio above 1.0 indicates that the investment will generate more income than necessary to cover loan repayments, while a ratio below 1.0 indicates that the investment will fall short.

From a lender’s perspective, the higher the ratio, the less risky the loan. Many lenders – particularly large commercial banks – require minimum DSCR ratios to even consider an applicant for a loan (and even then, there is no guarantee of approval). Typically, that minimum ratio is 1.25.

Debt-to-Income Ratio (DTI)

The debt-to-income ratio (DTI) is a measurement that predicts what percentage of your total monthly income (employment and investment revenue) is required to meet your total monthly debt obligations (the loan repayments plus other monthly obligations).

This ratio is equal to your total monthly debt payments divided by your total gross monthly income. Unlike the DSCR calculation, the lower the number, the less risky the loan.

While there is no real make-or-break percentage, several statistical studies suggest that a DTI of 43 percent and lower represents a low likelihood of default. As such, that has become the benchmark for Qualified Mortgage eligibility.

Are Those Financial Metrics Important to Us?

If you are looking to secure a commercial bank mortgage and you do not demonstrate a DSCR above 1.25 and a DTI below 43 percent, your loan approval is unlikely.

However, as a non-bank and no-ratio loan provider, Vacation Rental Loans does not consider the DSCR or DTI ratio when reviewing loan applications.

Instead, we provide No DSCR loans, which use sources other than your income to secure funds.

What is a No DSCR Loan?

A No DSCR loan, as the name suggests, is one where neither a minimum DSCR nor DTI ratio is required to become eligible. Not only will those ratios not impede the approval process, but they also do not impact the size of the loan or interest rate paid under the agreement.

No DSCR loans are asset-based, which are popular products for would-be rental property investors who want to qualify without income verification.

Asset-based loans typically leverage your existing assets in lieu of leaning on your expected income. This means that they do not require tax returns, proof of income, or minimum financial metrics to qualify.

Typically, borrowers are approved on a loan amount up to a certain percentage of the property’s appraisal value. The lender will then determine the interest rate paid based on the loan size and other agreed-upon terms of the loan, such as duration and repayment methods.

Summing Up: The Advantages of Using No DSCR Loans

Not every short-term rental property investor needs a No DSCR loan. For some, it might be the only way to access the funds necessary to purchase a property.

A No DSCR loan is much easier to qualify for than its DSCR counterpart. It is particularly attractive for investors with minimal income and properties in need of renovation and an unproven track record of generating income.

Mind you, once you own the property, you can update the home and lift it to a performing level that warrants a revised long-term financing agreement. The trick, however, is acquiring the property in the first place.

As already discussed, a No DSCR loan omits typical documentation requirements, such as W2s, 4506s, and paystubs. Lenders of these products also set lower credit standards than those associated with DSCR loans, making that initial loan much more attainable.

Lastly, you can close the agreement quickly – usually within three weeks – with minimal to no hassle.

Do Not Let the Numbers Stop You

You might be a novice short-term rental property investor or a seasoned pro. Either way, the advantages of using No DSCR loans are undeniable, and using these products might be the right choice for you.

At Vacation Rental Loans, we do not believe that numbers – like your DSCR and DTI ratios, credit score, or tax returns – should prevent you from securing a mortgage. We understand No DSCR loans, and we want to work with you to get the money you need to jumpstart your property investment endeavors.

Contact us today to request a quote.