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Non- QM Loans: Debt Service Coverage Program Loans

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For mortgage loans, lenders need to know that the borrower (whether a business or individual) has enough income to cover their loans. Debt service coverage is an expression of the ratio of income the individual or entity has in relation to their current debt payments. Many mortgage programs have requirements for their debt service coverage ratio, as it denotes the general “health” of the borrower’s financial situation.

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What Is a Debt Service Coverage Ratio?

For personal borrowers, the debt service coverage ratio will be their income divided by their current debt. Much like a debt-to-income ratio, it shows how much of the individual’s income is tied up in their existing payments. If a borrower has a DSCR of less than 1, they are unable to pay their current debts. A DSCR of 95% would mean that the borrower currently is only able to pay 95% of their debts, and must instead use their cash reserves for the remaining 5%.

Most lenders will not lend to an individual who cannot cover their current debts unless the borrower has significant cash reserves that could make up for it. Thus, debt service coverage ratios may determine whether the borrower can apply for a mortgage loan.

Non-QM Low DSCR Mortgage Loans

An individual with a poor debt service coverage ratio isn’t likely to be able to qualify for a qualified mortgage, due to the repayment requirements for a qualified mortgage. However, they may still be able to qualify for a non-QM loan. Non-QM loans don’t need to meet qualified mortgage requirements such as having a good DSCR. 

A non-QM mortgage program can have low DSCR qualifications, as well as no income requirements, or low documentation requirements. If you have a DSCR that makes you otherwise unsuitable for QM loans, a non-QM mortgage program will be your best bet.

DSCR Mortgage Programs for No Income and Low Income

No-income debt service coverage program loans are special loans intended for investors. These mortgage loans include things such as:

  • No income verification.
  • No personal income qualifications (such as DSCR).
  • Low debt-to-income ratio requirements.
  • Interest-only payment availability.

Why are these loans so favorable? They’re designed for investors, not residential home buyers. Many investors don’t have any personal income because they have tied their income up into their business, and they may not have a solid debt-to-income ratio for this exact reason. Since investors are flipping houses or trying to generate revenue quickly, they may need interest-only payment availability, or lower than average repayment requirements.

Low DSCR program loans are particularly useful for landlords. Landlords who are renting out multiple units are likely folding their rental income into paying off their current mortgages. On paper, they aren’t necessarily gaining a lot of money, but they’re building equity, and they’re leveraging their existing cash to purchase additional properties. The purchase of additional properties can keep landlord investors permanently in a state of low DSCR.

Asset-Based Low DSCR Programs

If you don’t have the income to back up your mortgage loan with, it’s possible to secure a mortgage with the weight of your assets. Essentially, you’re using your assets to show your ability to repay your loan. Asset-based programs are often used by investors or individuals who are purchasing a second home. If you’re purchasing a retirement home or you’re purchasing your investment, you may be able to leverage your existing assets.

In addition to asset-based low DSCR programs, there are also bank statement programs and stated income loans. These types of loans are meant for those who do not traditionally qualify, whether it’s because they have non-traditional income, or it’s because they need custom terms.

There are also “recent event loans.” Recent event loans take into consideration the fact that you may have recently experienced something like a foreclosure or bankruptcy. These recent events could explain why you may have low income or low DSCR. Recent events don’t necessarily mean that you’re a risky borrower, it only means that you may appear to be a risky borrower at the current time.

There are non-QM loans available for virtually every borrower, depending on the type of loan that you need, and the type of property you’re purchasing. In general, there are more options available for those who are looking for investment properties than for those who are looking for their own single-family, owner-occupant home.

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