DSCR Occupancy
DSCR Occupancy
The occupancy requirement is the defining characteristic of this loan product, establishing its classification as a business purpose loan.
Here is a clear and comprehensive summary of the DSCR occupancy requirements for properties financed with a DSCR loan, strictly based on the provided sources:
Occupancy Requirements for DSCR Loans
DSCR loans are exclusively for investment properties and are designated for business purposes only.
Prohibition of Borrower Occupancy
The central requirement across all DSCR programs is that the borrower cannot occupy the property.
- Investment Property Definition: An Investment Property is defined as a property not occupied by the borrower and one that does not meet the requirements of a second home.
- Business Purpose Affidavit: The borrower is required to sign a Certification of Business Purpose/Non-Owner Occupancy statement prior to funding. This affidavit typically states that:
- The property is not occupied by the borrower and the borrower does not plan to occupy the subject property.
- The borrower, nor any family member, intend or expect to occupy the property at any time while the loan remains outstanding.
- The borrower will not claim the property as their primary or secondary residence for any purpose for the duration of the loan.
- The borrower now resides, and will continue to reside, elsewhere for the duration of the loan.
- Multi-Unit Restriction: This prohibition includes multi-unit properties (e.g., a two-to-four-unit property). Even if the property has four units, and three are tenant-occupied, the fourth cannot be owner-occupied.
- LLC Restrictions: The property also cannot be occupied by the borrower(s), any member of the borrower’s LLC, or any family member.
Loan Exclusions Based on Occupancy
DSCR loans are structured to serve a specific market and are therefore ineligible for other occupancy types:
- Primary Residence: DSCR loans cannot be used on primary residences.
- Second Homes: DSCR loans are not designed for second homes. The definition of a Second Home requires it to be occupied by the borrower for some portion of the year and must not be a rental property or subject to mandatory rental agreements.
- Ineligible Borrowers: First-Time Homebuyers (FTHB) are generally not allowed on DSCR programs.
Property Income and Occupancy Status
While the borrower cannot occupy the property, the income qualification relies on its status as a rental property, which may affect the specific transaction type:
- Long-Term Rentals (LTR): The property must be, or intended to be, a rental unit for profit.
- Purchase Transactions: It is acceptable for the property to be vacant. Gross market rents from the appraisal forms (1007/1025) will be used for qualification.
- Refinance Transactions: Most refinance transactions require the property to be leased/occupied. Vacant refinances are generally ineligible unless the property has been recently rehabbed and is listed for rent. Vacant property refinances that are allowed may be subject to a reduction in LTV/CLTV.
- Short-Term Rentals (STR): STRs are defined as properties leased on a nightly, weekly, monthly, or seasonal basis. DSCR loans are eligible for STRs provided the property is legally permitted and common for the area.
- Vacant Property Rules: For purchase transactions, if a lease is not in place, the borrower must intend to obtain a tenant using commercially reasonable efforts following closing. A vacant property must be in “turnkey” condition for acquisition transactions.
- Leasing Restrictions: Properties leased to family members are not eligible.
In summary, a DSCR loan necessitates that the financed property be a non-owner-occupied investment property intended solely for generating rental income as a business activity.
FAQ's
Being designated as a business purpose loan allows the transaction to be exempt from Ability-to-Repay (ATR) and Qualified Mortgage (QM) requirements, offering greater flexibility in underwriting since the loan qualification is based solely on the property’s cash flow.
Yes, vesting in an LLC is permitted under the DSCR program. This is often preferred by investors for business protection.
Yes, if they are vacating the residence in favor of a new primary residence, the rental income can be considered under DSCR guidelines, provided documentation like a lease and proof of payments for the new residence is supplied. However, the refinance is ineligible if the borrower is currently living rent-free or residing in a different owned residence without establishing a new primary residence.
Generally no, refinance transactions require the property to be leased or occupied. Exceptions may exist, such as for properties leased through short-term rental (STR) agencies, or properties recently rehabbed and currently listed for rent.
Yes. For purchase transactions, it is generally acceptable for the property to be vacant. When calculating the DSCR in this scenario, gross market rents from the appraisal forms (1007/1025) are typically used.
The borrower is required to execute a Business Purpose & Occupancy Affidavit (or similar form) confirming the loan is for a business purpose.
No, even if the property has multiple units, the loan documents typically stipulate that the owner cannot reside in any specific unit.
No. The property cannot be occupied by the borrower(s), any member of the borrower’s LLC, or any family member.
No. DSCR loans are specifically for investment properties and cannot be used for a primary residence. An investment property is defined as one that is not occupied by the borrower and does not meet the requirements of a second home.
DSCR loans are strictly designed for investment properties and must be designated for business purpose only. They are classified as Non-Owner Occupied properties.
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