How do you meet atr requirements for dscr loans
ATR requirements for DSCR Loans are achieved through Exemption
The primary method by which DSCR loans “meet” ATR requirements is by operating outside the scope of consumer protection laws that mandate the ATR assessment for personal capacity.
A. The Business Purpose Classification
DSCR loans are strictly designed for investment property transactions that are designated for business purpose only.
- ATR Exemption: Loans that are deemed business purpose loans are generally exempt from ATR, Qualified Mortgage (QM), and Higher-Priced Mortgage Loan (HPML) requirements.
- Documentation of Purpose: Underwriters require documentation, such as a Business Purpose & Occupancy Affidavit, to certify that the loan proceeds will be used for a business purpose and that the property will not be occupied by the borrower(s) or any family member.
- Regulatory Basis: The exemption relies on the distinction that the loan is not secured by a borrower’s principal residence and is solely for generating income.
B. Exclusion of Personal Income and DTI
Because the loan is defined as a business debt secured by a business asset, the underwriter deliberately omits the standard checks required by the General ATR Option:
- No Income Verification: No income or employment is verified for the DSCR product. The employment section of the application should be left blank.
- No DTI Calculation: Qualification is determined solely based on the debt service coverage ratio (DSCR) of the subject property only. Consequently, no Debt-to-Income (DTI) ratio is calculated/developed for the DSCR product.
The Core Qualification Metric: The DSCR Calculation
Instead of assessing the borrower’s personal capacity to repay, underwriters assess the property’s capacity to repay the debt by calculating the DSCR. This metric replaces the individual ATR assessment.
A. Calculating the Ratio
The DSCR is a precise figure calculated using the following formula:
DSCR=Proposed PITIA (or ITIA)/Gross Rental Income
- Gross Rental Income (The Numerator): This income is determined by the property’s market rent.
– For Purchase transactions, 100% of the gross market rent from the appraisal (Form 1007/1025) is used. It is acceptable for the property to be vacant.
– For Refinance transactions, the gross rent used is generally the lesser of the executed lease agreement or the market rent.
– Short-Term Rentals (STR) use specific calculation methods, such as utilizing the AirDNA Rentalizer Property Earning Potential report or estimated gross receipts (often 80% of revenue). - Debt Service (The Denominator / PITIA): This includes the projected monthly expenses associated with servicing the mortgage debt:
– Principal, Interest, Taxes, Insurance, and Association dues. - Interest-Only (I/O) Qualification: If the loan includes an I/O feature, the DSCR calculation may be based on the Interest-Only payment (ITIA) rather than the fully amortizing payment (PITIA), provided the loan meets specific LTV restrictions.
B. Minimum DSCR Thresholds
We use the calculated DSCR to gauge risk.
- Standard DSCR: Many programs require a minimum DSCR of 0.75.
- Positive Cash Flow: A DSCR of 1.00x or above means the property is breaking even or generating positive cash flow and often results in more beneficial rates and terms.
- No Ratio Loans: Some lenders offer DSCR No Ratio Loans (DSCR less than 1.00x, often 0.75x or below). These require higher credit scores and/or larger down payments to offset the negative cash flow risk
Non-Income Underwriting Factors
Although ATR is exempt, underwriters still adhere to conservative guidelines that protect the loan’s performance, focusing on the borrower’s character and liquidity.
| Factor | DSCR Requirement |
| Credit Score (FICO) | Scores generally range from 620 to 700+. The lowest middle score of all borrowers is typically used to qualify the loan. |
| Reserves | Reserves are liquid assets required to cover housing expenses in case of vacancy. DSCR loans commonly require 6 months of the subject property’s PITIA/ITIA. Larger loans (e.g., >$1.5MM) may require 9 months. |
| Investor Experience | At least one borrower must have a minimum 12-month history of owning and managing rental properties within the last three years. First-Time Investors may be eligible but usually require a higher DSCR (e.g., Min 1.0 DSCR) and a higher FICO score (e.g., Min 700 FICO). |
| Credit Inquiries/Debt | Unlike Non-DSCR loans, an explanation for credit inquiries within the prior 90 days is not required. Furthermore, certain types of debt—like 30-day charge accounts—do not need to be considered. This reflects the focus shifting away from personal debt management. |
| Tax Transcripts | IRS tax transcripts are generally not required on DSCR loans, contrasting sharply with Full Doc and some Alt Doc loans. |
FAQ's
At least one borrower must often have a minimum 12-month history of owning and managing rental properties within the most recent three years.
Lenders typically require reserves (liquid assets) to cover potential debt payments, often mandating 6 months of PITIA or ITIA for the subject property.
While some programs offer “No Ratio” options, the minimum DSCR typically ranges from 0.75 to 0.80.
If the Loan-to-Value (LTV) ratio is 75% or less, the DSCR calculation may be based on the Interest-Only payment (ITIA) rather than the fully amortizing payment (PITIA).
A DSCR above 1.0 indicates that the property earns enough to cover the mortgage, meaning the investment has a positive cash flow in the lender’s view.
DSCR is calculated by dividing the Gross Rental Income from the property by the PITIA (Principal, Interest, Taxes, Insurance, and Association dues).
No income or employment is verified for this product, and consequently, no Debt-to-Income (DTI) ratio is calculated.
Qualification is determined solely based on the debt service coverage ratio (DSCR) of the subject property only.
No. Loans deemed strictly for business purposes are generally exempt from the ATR (Ability-to-Repay) and QM (Qualified Mortgage) requirements.
DSCR loans are specifically designed for investment property transactions designated for business purpose only.
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