Debt Service Coverage Ratio

A debt service coverage ratio mortgage is also called an investor cash flow mortgage which allows you to pay for an investment property with rental income, rather than your personal income. A debt service coverage ratio mortgage allows you to buy or refinance a rental property without the provision of tax returns, W-2s, pay stubs, or other financial proof needed for an ordinary mortgage. There is no requirement of employment or income proof, and the properties in the name of an LLC are also allowed.

 

Debt Service Coverage Ratio Requirements

• Rental income produced by the property must be more than the lender’s coverage ratio requirement.
• The coverage ratio must be equal to the monthly rental income divided by the payment. It generally varies from 1.0x to 1.5x, deciding on the factors.
• Certain lenders may need a minimum down payment of 20%.
• Rental survey and an appraisal is required. A rental survey is done to inform the lender of the rent generation of the property depending upon the rental comparables.

Debt Service Coverage Ratio Requirements:

• The rental income generated by the property must meet or exceed the lender's coverage ratio requirement.
• The coverage ratio equals monthly rental income divided by the mortgage payment and typically ranges from 1.0x to 1.5x, depending on the lender and borrower.
• Some lenders requires a minimum 20% down payment.
• An appraisal with rental survey is required. The rental survey tells the lender how much rent is to be expected based on rental comparables.