How a DSCR loan can benefit new and seasoned property investors

by Kasi Johnston03 Aug 2020

A key non-QM loan for property investors is back on the shelf. Arc Home has reintroduced their debt service coverage ratio (DSCR) loan.

DSCR is a calculation that allows a borrower to qualify for a mortgage based on cash flow generated from a property, through a rental, for example, as opposed to their personal income. The DSCR compares the property’s net operating income to the proposed mortgage debt service for the lender to ensure there is enough cash flow to support the loan.

This option is especially useful for either a seasoned real estate investor looking to grow their portfolio or a first-time investor who wants to purchase a rental property. With mortgage rates at historical lows, the DSCR loan could be a great financing option.

“If you’re looking to purchase a property or take cash out quickly, we don’t require all the personal income mandates with this product that you would have with an owner-occupied home or even a second home. It makes for a smooth process, paired with great rates,” said Will Fisher, division vice president at Arc Home.

With a 25% down payment, a DSCR loan will allow for rent to cover the entire mortgage payment, with no further income required. One concern post-COVID-19 is a renter’s ability to make payments.

“We considered this potential temporary, pandemic-driven situation our highest priority to insulate against.  We feel with a smartly designed reserve requirement and the requirement for proof of current rents to make sure mortgage payments are covered, this makes the product viable, while still assessing the risk appropriately,” said Fisher. An additional benefit, however, is allowing borrowers to use cash out of the reserves.

Arc Home’s DSCR offers up to $2.5 million in loan amounts and as low as a 1:1 ratio. Considering the state of the economy post-COVID, Fisher says this ratio places them in a unique position in the market.

“We've seen volumes in this product start to increase steadily since we released it,” he said. “This was an extremely hot product until the pandemic hit because borrowers liked the fact that this is a business-purpose loan, which comes with certain qualification benefits.”

As a non-QM lender, Fisher says rates are also extremely competitive. Arc Home re-released their non-QM product line last month, including alternative-income bank statement loans, asset utilization qualification, and of course, the DSCR loan.

“Since our return to the non-QM space in July, we’ve been thrilled to see our products greeted with such success and fanfare. People are excited, and these are clearly important offerings to consider during these difficult economic times.”