DSCR Loans – Chicago Investors’ Cash Flow Mortgages
Chicago DSCR loans are meant for real estate investors only. More specifically for real estate investors who want a simpler way to get a mortgage but hate hard-money interest rates.
DSCR loans do not require tax returns or any other proof of personal income. The only thing that matters is the debt-service-coverage ratio of the property you’re buying or refinancing. Your other properties’ income is not relevant.
How Do Chicago’s DSCR Loans Work?
Lenders order an appraisal that determines both the value of the property and the market rent. The value determines the maximum loan amount; the market rent (or the actual rent, if it’s lower than the market rent) gives the income lenders use to qualify DSCR loan borrowers.
They then divide the income by the property expenses (principal, interest, property taxes and insurance and, if applicable, association fees).
Properties with a ratio higher than 1.00% have positive cash flow; those with a ratio of 1.00% are braking even; and those with a ratio lower than 1.00% have negative cash flow.
Some lenders do not lend unless the ratio is 1.25%; some want a lower rate, with some going as low as 0.70%. And, then, there are the ones that do not care what the rate is.
The lower the rate, though, the higher the interest rate.
Even so, some people find properties with negative cash flow that, despite the higher interest rate, are a good investment in the long run.
Typical DSCR Loan Features
- 15% minimum down payment required (for borrowers with credit scores over 760, usually; lower credit scores require higher down payments);
- 30-Year fixed rate terms or 5/1 ARM’s, 7/1 ARMS;
- No PMI, no matter what the down payment;
- Non-owner occupied only;
- 1 to 8-unit properties (single family houses, townhouses, condos, 2 to 4-unit buildings, 5 to 8-unit buildings); some lenders will also lend against condotels and other non-warrantable condos;
- Pre-payment penalties. Typically, they’re from 1 to 5 years (lower prepayment terms increase the cost of the loan / terms; some lenders remove them completely, for a price);
- Most lenders want long-term rentals; some will lend against short-term rentals (Airbnb) but treat them as if long-term (that means they use the market rent amount for 1-year leases); a few will lend against short-term rentals and use the short-term rental income to qualify borrowers;
- Loan sizes: typically, at least $100,000; some lend up to $4,000,000, some up to only $1,500,000; some up to somewhere in-between;
- DSCR loans can be closed in the borrower’s name or in the borrower’s LLC’s name (or some other legal entity).
DSCR Loan Qualification Requirements
- Typically, borrowers must own their own primary residence. A few lenders will also lend to lenders, provided they can provide proof they’ve paid the rent on time in the 12 months preceding the application.
- 15% – 25% down payment required (depends on lender and borrower’s middle credit score).
- The most recent 2 months of your bank statements – to show you have enough funds for the down payment and closing costs and, if applicable, reserves. Reserve amounts vary, based on credit score, DSCR ratio, and experience.
- Minimum credit score changes over time though, in general, most lenders want to see at least 640.
In Chicago, DSCR mortgages work well in some neighborhoods, not so well in others.
In some of Chicago’s neighborhoods and suburbs, property prices and insurance are so high that it’s impossible or, practically impossible, to find a property with a DSCR of 1.00% or higher. Think Gold Coast, River North, Streeterville, Winnetka, Glencoe, Hinsdale. But if you found one that, long term, can benefit you, a DSCR loan might just be what you need all the same.
There are other types of mortgages Chicago investors can get that do not require full documentation, such as bank statement loans and profit & loss loans. If you have questions about those, contact me or browse this site.