Owning real estate is one of the best and most proven ways to build wealth. Now, buying rental property has become much easier. Whether buying investment property for the first time or a seasoned real estate investor, there is a program which practically qualifies the buyer solely on the rental property. Imagine being able to purchase investment property only using the debt service coverage ratio. Therefore, the main way to qualify is using the market rent for the new property. So, we explain how simple it is to purchase or even refinance rental property.
What is Debt Service Coverage Ratio?
Most mortgage loans require tax returns, W2’s, and pay stubs in order to qualify to purchase or refinance real estate. Although when it comes to purchasing rental property, it is possible to qualify using a debt service coverage ratio. No other income requirement! So, the only income calculation required is the rental income compared to the new mortgage payment on the rental. Thus, no tax returns required and the borrowers do not even have to sign a 4506 for requesting transcripts from the IRS. In the end, it is about as close as one can come to a no income verification home loan.
Debt Service Coverage Ratio Calculation
Buying a rental, the income calculation is based solely on the subject property’s cash flow. As long as the total housing payment for the rental property does not exceed the market rent, the income is sufficient! The total housing payment must include principal, interest, property taxes, insurance, and HOA dues (if applicable). PITIA for short. Then, the monthly amount of all of these must not exceed the market rent per the appraisal. If the PITIA exceeds the market rent by $1, the payment must be lowered in some way for it to work. This could mean lowering the loan amount or possibly a lower insurance quote.
Other Debt Service Coverage Requirements
In order to buy investment property using this program, there are some additional requirements. Although, the guidelines are very lenient.
While this program offers both fixed and adjustable interest rates, the credit scores are very flexible. Here are the credit score requirements.
- 640 or higher credit score = 80% of price / value
- 600 – 639 credit score = 75% of price / value
- No more than times 60 days late on any debt in last 12 months
Employment Verification – No Income
Even though no other income other than rental income is calculated, borrowers must have verifiable employment. The only verification of employment performed is the lender performs a verbal verification of employment. So, just verifying currently employed but not the income. Yet, the employment requirement may be waived. An exception may be made if the borrower provides proof of ownership of at least 6 investment properties in the previous 3 years. A CPA letter is acceptable to prove this.
Down Payment Requirements for Debt Service Coverage Ratio Program
Above you saw the down payment requirements based on credit scores. But if a first time investor, the down payment increases by 5% of the sales price. Unlike other rental property purchases, this debt service coverage program allows for 100% gift funds in down payment. Yet, the down payment requirement increases by 10% when using all gift funds. Using 5% of the buyer’s own funds and the rest as a gift, there is not an increased down payment requirement. Proving the down payment and closing costs requires a most recent 30 day bank statement.
Using Debt Service Coverage Ratio to Refinance a Rental Property
Although typically used for a purchase, this rental loan may be used to refinance a property. Since the rates are higher for these loans, it is not usually something used for a rate and term refinance. But sometimes an existing rental property loan may have a balloon payment or private loan must be paid off. Also a refinance allows an exception to use actual existing rental income rather than the market rent from the appraisal. In order to use the existing lease, the most recent 3 months of rent receipt must be proven.
Eligible Property Types
Depending on the credit score and whether a purchase or refinance, property types may be residential single family, 2 – 4 unit dwellings, townhomes, and condos.