DSCR eligibility requirements
DSCR eligibility requirements
The Debt Service Coverage Ratio (DSCR) program is a type of Non-Qualified Mortgage (Non-QM) product designed exclusively for investment property transactions that are designated for business purposes only. DSCR Eligibility requirements and DSCR calculation are discussed below.
Core Qualification Principle
The primary qualification factor is the cash flow generated by the subject property itself.
- Income and DTI Exemption: Borrower personal employment and income are not required, and consequently, no Debt-to-Income (DTI) ratio is calculated.
- Regulatory Exemption: Because these loans are deemed business purpose loans, they are exempt from Ability-to-Repay (ATR), Qualified Mortgage (QM), and High-Cost Mortgage Law (HPML) requirements.
DSCR Calculation and Minimums
The DSCR is calculated by dividing the property’s gross rental income by its proposed monthly debt obligations (PITIA or ITIA).
- Formula: DSCR = Gross Rental Income / Proposed PITIA (Principal, Interest, Taxes, Insurance, HOA).
- Interest Only (IO) Loans: For loans with an IO feature, the DSCR calculation can often use the Interest Only payment, making the ratio Gross Rental Income / ITIA.
- Minimum Ratio: The minimum DSCR generally required is 0.75.
- No Ratio Options: Some programs (like Sharp DSCR and Horizon DSCR No Ratio) accept a DSCR of less than 0.75 (0 to <0.75), known as “No Ratio”.
- Higher Requirements:
- Loan amounts : $150,000 may require a minimum DSCR of 1.25 (Edge, Horizon, River programs).
- DSCR : 1.00 or 1.15 is often required for specific scenarios like First-Time Investors or Short-Term Rentals (STRs).
Borrower and Entity Eligibility
DSCR eligibility focuses heavily on the investor profile and entity structure.
| Borrower Status | General DSCR Eligibility | Key Restrictions/Notes |
| U.S. Citizens / Permanent Resident Aliens | Eligible | Generally eligible with standard requirements. |
| Non-Permanent Resident Aliens (NPRA) | Eligible (Advantage, Edge, Horizon, Prime) | Must document lawful residency/employment authorization. Eligible Visa types are specified (e.g., E, G, H, L, O, P, TN). |
| Foreign Nationals | Eligible for DSCR programs (Advantage, Sharp, Horizon) | Ineligible for many other Non-QM programs (Edge, Horizon, Prime). If eligible, often subject to a max LTV of 70% and min DSCR of 1.1. |
| ITIN / DACA | Generally Ineligible | ITIN is specifically not permitted on the DSCR product in the Prime program. DACA recipients are also typically ineligible. |
| First-Time Homebuyers (FTHB) | Generally Ineligible | May be eligible under the Edge Investor Classic program only, provided they meet specific DSCR (Min 1.0) and FICO (Min 700) requirements. |
| First-Time Investors (FTI) | Eligible, with restrictions | Must typically meet higher standards, such as Min DSCR of 1.0 and Min FICO of 680 to 700. |
| LLC Vesting | Allowed (DSCR only programs) | This is a major feature of the DSCR program, often requiring a personal guarantor. Layered entities (LLCs owned by LLCs) are typically not permitted. |
| Non-Occupant Co-Borrowers | Not applicable/Ineligible in DSCR programs | Qualification is solely on property income. |
Credit and Reserve Requirements
Since personal income isn’t verified, credit history and asset stability remain crucial.
- Credit Score: A minimum representative score of 620 is generally required for all borrowers, though the specific minimum FICO depends on the LTV and loan amount (e.g., up to 740 for higher LTV tiers).
- Qualifying Score: The lowest representative score of all borrowers is typically used to qualify for the DSCR program.
- Tradelines: All borrowers on DSCR transactions must meet minimum tradeline requirements. This usually means either three tradelines reporting for 12+ months (with one active in the last 12 months) OR two tradelines (one reporting 24+ months, one 12+ months).
- Housing History: A satisfactory 12-month housing history is required for the borrower’s primary residence and the subject property (if a refinance). For DSCR ?0.75, the combined history may not exceed 1×30 in the past 12 months.
- Credit Event Seasoning: Seasoning periods for significant derogatory credit events (Bankruptcy, Foreclosure, DIL, etc.) vary by program:
- 3 years (Advantage, Horizon, Sharp Classic).
- 4 years (Investor Edge Elite, Horizon Elite).
- Multiple bankruptcies are generally ineligible regardless of seasoning.
- Reserves: Reserves are calculated based on the subject property’s PITIA/ITIA payment. Standard requirements often call for 6 months of reserves. Higher loan amounts (> $1,500,000) or lower DSCRs (< 1.0) may require 9 months. Some highly qualified loans may waive reserve requirements.
Property and Transaction Details
- Eligible Property Types: Generally include 1–4 unit residential properties, PUDs, Condos (Warrantable and Non-Warrantable), and Condotels.
- Ineligible Property Types: DSCR loans cannot be used for purchasing a primary residence or a second home. Other ineligible properties often include: properties with acreage exceeding 5 acres (for investment properties in Horizon/Advantage/Nations Direct), properties subject to a rental agreement with a family member or the borrower.
- Short-Term Rentals (STR): STR income is permitted. Qualification typically relies on third-party verification (like AirDNA) for purchases or 12 months of actual income history for refinances.
- Cash-Out Refinance: Cash-out is generally permitted. Some programs require the borrower to have owned the property for a minimum of six months prior to the note date for a cash-out transaction.
FAQ's
Yes, loans with a DSCR below 1.00 are eligible for many programs (e.g., Sharp DSCR and Horizon DSCR offer options for 0.75x–0.99x). Some programs even offer a “No Ratio” option for loans with a DSCR of 0 to <0.75. However, these typically require a larger down payment/equity and more reserves to offset the negative cash flow.
The minimum DSCR generally starts at 0.75x. A DSCR of 1.00 or higher indicates that the property’s income is sufficient to cover its debt (positive cash flow). Lenders typically prefer a DSCR of 1.2 or more, which can lead to better rates and terms.
The DSCR is calculated by dividing the Gross Rental Income from the property by its proposed monthly debt obligations, or PITIA (Principal, Interest, Taxes, Insurance, and Association fees).
No, borrower personal employment and income are not required, and consequently, no Debt-to-Income (DTI) ratio is calculated. The qualification decision is made solely based on the cash flow (DSCR) generated by the subject property itself.
The DSCR program is specifically designed for investment property transactions that are used strictly for a business purpose. As such, these loans are exempt from the Ability-to-Repay (ATR) rule, Qualified Mortgage (QM), and High-Cost Mortgage Law (HPML) requirements.
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