Learn How Section 8 DSCR Financing Works
Qualify for a Section 8 Home Loan Without Tax Returns Using a DSCR Loan
Section 8 real estate investors can bypass strict lending requirements, lengthy approval processes, and high-cost private loans with a Debt Service Coverage Ratio (DSCR) loan. This type of no-income loan allows you to qualify for a Section 8 rental based on your property's cash flow rather than your personal income or tax returns.
A DSCR loan makes it easier to secure financing and grow your Section 8 rental investment portfolio without the traditional hurdles of income verification. Keep reading to learn more about how DSCR loans work and what you need to qualify.
DSCR Loan Requirements
There are specific criteria that must be met to qualify for a DSCR loan. The key requirements include:
Minimum Credit Score of 620: Borrowers will have their credit history evaluated. Credit requirements can vary depending on the specific loan terms. While borrowers who work with us typically have an average credit score of 732, we are also able to assist those with scores as low as 620.
Minimum Loan Amount of $40,000: DSCR loans are available in amounts ranging from $40,000 to $1,000,000, making them a flexible option for financing properties of various values.
Appraisal: An appraisal is required to assess the current market value and rental income potential of the property.
Property Type: DSCR loans are specifically for investment properties that generate rental income. The property being purchased or refinanced must be a non-owner-occupied, income-generating property intended for business use, and purchased with an LLC. These loans cannot be used for primary residences.
What Is the Debt Service Coverage Ratio (DSCR)?
The Debt Service Coverage Ratio (DSCR) measures a Section 8 rental property's annual gross rental income against its yearly mortgage obligations, including principal, interest, taxes, insurance, and HOA fees (if applicable). Lenders use DSCR to assess how much of a loan the property's income can support and to evaluate the income coverage at a given loan amount.
How to Calculate DSCR
The Debt Service Coverage Ratio (DSCR) determines a property's ability to cover its mortgage obligations using rental income. Lenders use this ratio to assess how much of a loan the property can support and evaluate income coverage at a specific loan amount. When calculating DSCR, certain expenses such as management, maintenance, utilities, vacancy rate, and repairs are not included.
Determine Gross Rental Income
Calculate your annual gross rental income by taking the lower value between:
The rental income from your lease agreement
Example of Debt Service Coverage Ratio Calculation
Let’s say a real estate investor is evaluating a property with the following financials:
Annual Gross Rental Income: $50,000
Annual Debt Obligations: *$40,000
To calculate the DSCR, divide the rental income by the debt obligations:
*Principal interest and taxes, real estate taxes, property insurance, and HOA fees if applicable
A DSCR of 1.25 means the property generates 25% more income than needed to cover its loan payments. From a lender’s perspective, this indicates positive cash flow, making the investment less risky.
Why DSCR Loans Are Ideal for Real Estate Investors
Many investors in real estate face challenges qualifying for conventional loans because they write off a significant amount of expenses associated with their properties. This can lead to income figures that are not reflective of the true financial strength of the investor. A Debt Service Coverage Ratio (DSCR) loan is designed to solve this issue by eliminating the need for traditional income verification such as tax returns or pay stubs. Since these documents often don’t accurately reflect the investor's actual income due to various business write-offs, DSCR loans allow for more flexibility in qualifying for financing.
DSCR loans are especially useful for Section 8 properties that are intended to generate rental income. DSCR loans can help you obtain financing based on the cash flow your property generates, rather than your personal income.
Typical financing terms
For example:
With a DSCR ratio of 1.00 or higher on a loan amount of $40,000 - $400,000, the typical requirements would be:
20% down payment
620 credit score
3 months of reserves at leander’s option based on credit score
Real estate investors looking to improve their DSCR can increase the ratio by choosing an interest-only loan or extending the loan term to 40 years, which helps maximize cash flow.
What Is a Good DSCR Ratio?
In general, lenders often require a DSCR of 1.25 to qualify for a DSCR mortgage. However, it's possible to qualify for a loan with a DSCR below 0.75, although this will typically come with more stringent requirements.
Borrowers with a strong DSCR ratio tend to secure more favorable loan terms and interest rates. A DSCR ratio of 1.25 or higher usually offers the best rates and terms. On the other hand, a DSCR ratio below 0.75 typically requires a larger down payment, more equity, and higher reserves to compensate for the potential negative cash flow.
