Debt Service Coverage Ratio: California DSCR Loans

California Hard Money Direct has quickly become one of the premier DSCR lenders in California. Our ability to close fast with minimal paperwork is garnering a lot of attention from brokers, realtors, and borrowers. We have already funded multi millions of dollars in DSCR loans. Our professional staff is considered amongst the best in the industry. Our team is available six days a week to walk you through the process from start to finish.

What is a DSCR loan (Debt-Service Coverage Ratio)?

A DSCR loan, also known as debt service coverage ratio loan, is when a loan is granted for either purchases or refi’s, assuming the rental  income covers expenses.  These loans are quickly increasingly popular because personal income or employment is not required. Lenders are interested in the cash flow of the subject property.

 

If you are seeking a DSCR loan to purchase property an appraisal with rental survey is ordered. The rental survey tells the lender how much rent is to be expected based on rental comparables. 

 

A DSCR loan for a refinance will also require an appraisal with rental survey.  The rental survey tells the lender the amount of rental income the property should be able to generate. In either scenario, if the property has the potential to generate more money than expenses, the property essentially qualifies itself.

DSCR Loan Request

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How to Calculate The DSCR Formula

Our basic formula for granting DSCR loans is a 1.1 ratio. Our 1.1 ratio means the property generates 10 percent more income than is needed to pay the debt obligation. 10% provides the lender a slight cushion considering anything unforeseen that may pop up. The 10% cushion assures the lender, the property is generating a bit of positive cash flow. 

The same formula works for refinances. It’s all about the property making enough money to cover expenses.

DSCR Example

For example, the borrower intends to purchase a property for $400,000 with 20% down. Our loan would be $320,000. If the borrower qualified for a rate 4.5% the payments would be $2204 including taxes and insurance. If the rental survey stated the property should generate $2900 per month, the property would qualify for DSCR.

The same formula works for refinances. It all boils down to the property generating enough money to cover expenses. For example, the property appraises for $400,000. The owner wants to refinance taking cash out up to 80%. Our loan would be $320,000. If the borrower qualified for a rate of 4.5% the payment would be $2204 per month. The property is rented for $2900 per month.  The property qualifies for DSCR. 

There is an important caveat to discuss when it comes to refinances. Using the same example from above with one big change. The property is owned by a borrower who leases it to their daughter and son-in-law. The property should generate $2900 per month. Being generous parents, they are renting it for only $2100 per month. At $2100 they wouldn’t qualify because the property will not generate enough income to cover $2204 of PITI. Even if the rental survey shows the property should rent for $2900 per month. The potential rent becomes a moot point because the property It isn’t currently renting for $2900 a month now. 

A property does not have to be rented at the time the loan is being made. If it is a purchase, the rental survey would be completed showing what it should rent for. The loan will be based on that. It is a refinance and the rental survey will show what it should rent for. The loan will be based on that.

Working with a DSCR Lender

The requirements for getting a DSCR loan are minimal. We are looking at the potential of the property and looking less at the borrower. DSCR is truly unlike any other product out there. Minimum FICO is required. Generally speaking, we will consider FICO scores of 640 or above. Exceptions have been made to allow even lower scores. The property must be residential 1 to 4 units. Non owner occupied and must be located in California. The minimum loan amount is $200,000. The maximum loan amount is $2,000,000.

DSCR Loans in California

Consider working with our trusted DSCR lenders. We've been helping Californians with DSCR loans for years with a five star reputation.

What is an Acceptable Debt Service Coverage Ratio?

Our basic formula for granting DSCR loans is a 1.1 ratio. Our 1.1 ratio means the property generates 10 percent more income than is needed to pay the debt obligation. 10% provides the lender a slight cushion considering anything unforeseen that may pop up. The 10% cushion assures the lender, the property is generating a bit of positive cash flow. 

 

The same formula works for refinances. It’s all about the property making enough money to cover expenses.

There is not a one-size-fits-all when it comes to calculating DSCR ratios. California Hard Money Direct has a 1.1 ratio. At 1.1 we are considered to be on the low end of the spectrum. There are other lenders out there requiring a ratio that goes to at least 1.25. At 1.25 the property generates at least 25% more income than the monthly expenses. Properties in California are very expensive. Requiring a 1.25 ratio will leave many people out of the DSCR program. Being based in California and only lending in California, we understand the difficulties in achieving anything higher than a 1.1 ratio. At 1.1 we are only requiring the property generate 10% more than needed to cover the debt.

 

At California Hard Money Direct the minimum debt service ratio is almost always 1.1% other lenders require a minimum DSCR of 1.25%. The higher ratio allows those lenders to stay within their comfort zone. Being a California based company, we understand bringing ratios all the way up to 1.25 will disqualify too many potential applicants. By keeping our ratios at 1.1% it allows us to approve a significantly higher number of applicants.

The Minimum Debt Service Coverage Ratio

Our minimum debt service coverage ratio is 1.1%. Most lenders require a minimum DSCR of 1.25%. The higher ratio helps to keep conservative lenders within their comfort zone. This allows for more positive cash flow after expenses are paid. It also leaves out potential borrowers because they can’t meet the 1.25 criteria.

What is DSCR in Real Estate?

DSCR is probably one of the most simplistic ways of calculating loan approvals that ever existed. If you already own a property or you want to purchase a property for investment purposes DSCR may be perfect. As long as the property can or does generate enough rental income to cover expenses chances are you will qualify for a DSCR loan. It’s all about the property’s income, not your income.

How Does a DSCR Loan Work

Before purchasing a property, it is best you do your homework. Find out how much the property should rent for. Rental income is easy to determine as there are typically lots of rental comparables out there. Your realtor can help you with this. With 20% down or 25% down have your realtor calculate at 4.5% what your mortgage payment would be on a 30-year loan. If the property you want to buy can make enough money to cover your new mortgage payment including taxes and insurance, you would be a perfect candidate for DSCR.

DSCR Mortgage Benefits

There are several reasons DSCR loans are gaining quickly in popularity. The most significant reason is, personal, income or employment is not required. Lenders are interested in the cash flow of the subject property.

  • In some instances, DSCR as low as 1.00% 
  • Impounds are not required  
  • Unlimited financed properties  
  • No income verification – qualify on subject property income
  • No employment required
  • No lease required if not rented
  • Minimal paperwork
  • No income and no job required
  • Transfer appraisals accepted
  • Gift funds allowed after 10% from borrower’s own funds
  • First-time investors: Up to 75% LTV
  • Cash-out is allowed on Refi’s
  • Cash out can be used to meet reserve requirements
  • Vesting allowed in LLC, Corporations and Trusts
  • 30-year fixed, SOFR ARMs 5/6 & 7/6 with Interest-Only options
  • Purchase up to 80% LTV and cash-out up to 75% LTV
  • SFR, condo, 2-4 units and short-term rentals
  • Fast closing times

In a competitive buyers market, fast closing times to make the difference between your offer being the winning or losing bid. Cutting out the job history background check and income verification allows DSCR loans to close significantly faster than conventional loans.

What is Considered a Good DSCR Ratio?

For California Hard Money Direct a 1.1 ratio has proven to be acceptable. When we underwrite the loan we calculate principal, interest, taxes and insurance. We add everything in to make sure the property will debt service. At 1.1 we are allowing for a little bit left over as a cushion. We don’t make it mandatory for the borrower to impound for taxes and insurance. This is a decision we leave up to the borrower.

DSCR Loan
Rates

DSCR rates range from 4.25% to 4.75% on average. 

It depends on LTV and credit score.

We don’t require income information on the borrower but the higher the FICO the better the rate. 

The lower the LTV the better the rate.

Read what other borrowers have to say about working with our DSCR lenders.

A reliable DSCR lender.

Ray V

This company is on it and makes the loan process easy. Great communication and closed fast on my loan. Will definitely recommend.

Arbi Z

It’s an excellent place to do business with. There were no surprises, everything went smoothly and good from the first phone call until the end. Judy was taking care of me. She is so professional you won’t regret working with.

Wendy O

I am an investor. I’ve been working with Judy for years. I’ve probably funded about 20 loans with her. I can count on her to be professional, honest, smart and efficient. It is a pleasure to work with her.

Applying For a Non-QM Mortgage

The application process is quite simple. All you need is a DSCR loan application, credit report and purchase contract if it is a purchase. For refinances we need an application, credit report and a copy of your current lease. Within a matter of a few days, we will let you know if you have been pre-approved and at what interest rate. From there things move very quickly. We can typically close DSCR loans in approximately 3.5 weeks. Get started today by calling our offices at 1-310-893-6680. We are here to assist you from Monday to Saturday.

Anything above 4 units will not qualify for DSCR but we do have other fantastic programs for larger units. Please inquire directly for further information.

Fast approvals on DSCR loans with California Hard Money Direct