Qualifying for a Loan Using Property Cash-Flow

Mar 21, 2024

When we assess investors and properties, our main focus is on projected cash-flow. The key question is whether the property or properties being purchased will generate enough income to cover the mortgage and other recurring expenses.

To determine this, we perform a straightforward calculation. Initially, we compute the investor’s monthly gross rental income based on the lower of two metrics. The first metric is the 12-month average of short-term rental income, while the second involves the comparable market rent from either Fannie Mae Form 1007 (for a single-family property) or Form 1025 (for properties with two to four units).

This calculated figure is then divided by the investor’s expected monthly expenses, known as PITIA (principal, interest, taxes, insurance, and homeowners association fees). The resulting value represents the investor’s debt service coverage ratio.

If the ratio equals 1.0 (i.e., breaking even), we can anticipate that the borrower has the necessary funds to repay the loan. A ratio exceeding 1.0 indicates positive cash flow even after factoring in monthly expenses. These metrics play a crucial role in our final decision and the terms they extend. Some non-QM lenders may offer DSCR loans to investors with a ratio below 1.0 if they possess additional assets to offset any shortfall.

The terms and prerequisites for such loans will vary among lenders. Common requirements include a maximum loan-to-value ratio of 80%, maintaining six months of reserves in a federally insured U.S. bank, and the ability to vest through a limited liability company or corporation.

We are all about DSCR mortgages, we offer no ration DSCR loans, and we offer second mortgages DSCR using rental income to qualify the property.

Contact us for more clarification on what a DSCR loan can do for you.

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