Loans for Self-Employed Real Estate Investors
The Dedicated Solution: Debt Service Coverage Ratio (DSCR) Loans
DSCR loans are the leading segment in the Non-QM market, specifically tailored for real estate investors. These Loans for Self-Employed Real Estate Investors are secured by residential real estate used strictly for a business purpose and are underwritten primarily based on the performance of the property itself.
A. Core Qualification Mechanics
The key feature of a DSCR loan is that qualification is determined by the property’s cash flow, eliminating the reliance on the borrower’s personal income, W-2s, or tax returns,,,.
- No Income or DTI Verification: DSCR loans require no income or employment verification. Consequently, no Debt-to-Income (DTI) ratio is developed for this product.
- The DSCR Calculation: The Debt Service Coverage Ratio measures a property’s rental income compared to its debt obligations.
DSCR=Annual Debt (PITIA)/Gross Rental Income
• Minimum Ratio: A DSCR above 1.0 indicates positive cash flow, meaning the property generates more income than necessary to repay the loan,. DSCR loans can be funded for borrowers with a ratio as low as 0.75x,,, or 0.80x,, depending on the program, LTV, and credit score.
B. Property and Investor Eligibility
DSCR loans are intended exclusively for income-generating investment properties,,.
- Eligible Property Types: DSCR loans can be used for Single Family Residences (SFR), condos, townhomes, and multifamily properties (2–4 units)
- Occupancy Restriction: The property must be non-owner-occupied and used for business purposes only,,. They cannot be used for a primary residence or a second home
- Property Condition: The property must be turnkey and move-in ready for tenants; DSCR loans are generally not suitable for fixer-uppers or properties requiring major renovation or construction,.
- New and Experienced Investors: DSCR loans are available to both first-time real estate investors and seasoned professionals looking to scale their portfolio,. However, some programs require first-time investors to meet a minimum DSCR of 1.0 and a minimum credit score (e.g., >700 FICO),.
- Investor History: Professional investors must typically have at least 12 months of experience owning and/or managing income-producing real estate within the most recent 36 months,. A motivation letter may be required for those purchasing an investment property without owning a primary residence.
Financing Options and Investor Flexibility
DSCR loans offer specific features that address the needs of sophisticated self-employed investors who prioritize capital liquidity and flexible scaling.
A. Entity Vesting (LLC)
DSCR loans are ideal for investors who operate their business through entities for liability protection,.
- LLC Eligibility: Vesting or title ownership in the name of an LLC (Limited Liability Company) is acceptable on investment property transactions.
- Liability Protection: Closing the DSCR loan in the name of an LLC can help protect personal assets. If structured properly, the loan may not be reported to the personal credit report.
- Borrower Role: The loan application is typically made in the individual borrower’s name, but all borrowers must sign the Deed of Trust/Mortgage and the Note as individuals and as authorized signors of the LLC. The LLC must be U.S.-based, and its business purpose limited to the ownership and management of real estate.
B. Cash-Out Refinancing and Portfolio Scaling
DSCR cash-out refinance loans are widely used by investors to leverage equity.
- Unlimited Cash-Out: DSCR loans offer unlimited cash-in-hand for loans with Loan-to-Value (LTV) ratios below 60%.
- Business Purpose Requirement: Cash-out proceeds must be used solely for business purposes (e.g., purchasing additional rental properties, renovating existing assets, or funding business operations),,. They cannot be used for personal expenses.
- No Seasoning Required: Unlike conventional loans, DSCR loans do not require a six-month holding period before a property can be refinanced for cash-out.
- No Limit on Properties: DSCR loans allow investors to purchase multiple properties simultaneously with no limit on the number of properties financed.
C. Short-Term Rentals (STRs)
DSCR programs have adapted to include short-term rental strategies (like Airbnb and VRBO).
- Income Qualification: STR income may be documented using a supplemental appraisal form, a third-party property management provider, or vendors like Airbnb, VRBO, or HomeAway. Qualification may also use projections from specialized tools like AirDNA.
- Deduction: The gross rental income calculation often applies an expense factor, such as multiplying the gross receipts by 80% to account for operating costs.
- LTV Limits: LTV ratios are generally tighter for STRs. For example, some programs cap STR LTV at 70% and require a minimum DSCR of 1.00x.
Non-DSCR Options for Self-Employed Investors
For investors who do not utilize the DSCR product, other Non-QM Alt Doc options remain available for investment properties, focusing on personal income calculation,.
Non-DSCR Option | Investor Profile | Qualification Method |
Bank Statement Loans | Self-employed investors who need to show personal cash flow. | Uses 12 or 24 months of business bank statements to calculate qualifying income by applying an expense ratio to deposits. |
Full Documentation | Real estate investors with fewer than 5 residential units who are retaining departing residences as rentals,. | Utilizes tax returns (Schedule E) and allows for the add-back of non-cash expenses (like depreciation) to determine qualifying income. |
P&L Statement Only | Self-employed borrowers (including investors) seeking to qualify via net income attested to by a CPA,. | Requires a P&L prepared by an independent CPA/EA, verifying income over the last 12 or 24 months, typically restricted by LTV. |
Note on Rental Income Qualification (Non-DSCR): When tax returns are not provided, rental income on non-subject properties is typically calculated using 75% of the current lease income less the documented PITIA (Principal, Interest, Taxes, Insurance, and Association dues).
FAQ's
The investor can use a Bank Statement Loan. This loan uses 12 or 24 months of business bank statements to verify the borrower’s cash flow/deposits, ignoring the low taxable income reported on their tax returns.
The cash-out proceeds must be used solely for business purposes (e.g., purchasing additional rental properties, renovating assets, or funding business operations), and cannot be used for personal expenses.
Yes, vesting title in the name of an LLC is acceptable on investment property transactions. This structure can help protect personal assets.
DSCR loans offer no limit on the number of properties an investor can finance, which enables them to purchase multiple properties simultaneously.
Yes, DSCR loans are eligible for all types of rentals, including long-term and short-term rentals. Lenders may use specialized reports like AirDNA to determine rental income projections for STR purchases.
While lenders typically prefer a ratio of 1.2 or higher, some DSCR programs allow borrowers to qualify with a ratio as low as 0.75x.
A DSCR above 1.0 indicates positive cash flow, meaning the property generates enough gross rental income to cover its monthly mortgage debt (PITIA: Principal, Interest, Taxes, Insurance, and HOA fees).
Qualification is based solely on the property’s cash flow or projected rental income, measured by the Debt Service Coverage Ratio (DSCR). No personal income, employment, or DTI (Debt-to-Income) ratio is verified.
Self-employed investors often claim significant tax write-offs that lower their personal taxable income, which prevents them from qualifying for a conventional loan. DSCR loans eliminate the hassle of tax returns and W-2s.
The main product is the Debt Service Coverage Ratio (DSCR) loan. These loans are secured by residential real estate used strictly for a business purpose.
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For informational purposes only. No guarantee of accuracy is expressed or implied. Programs shown may not include all options or pricing structures. Rates, terms, programs and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions may apply. Equal Housing Opportunity.
Interactive calculators are self-help tools. Results received from this calculator are designed for comparative and illustrative purposes only, and accuracy is not guaranteed. Shining Star Funding is not responsible for any errors, omissions, or misrepresentations. This calculator does not have the ability to pre-qualify you for any loan program or promotion. Qualification for loan programs may require additional information such as credit scores and cash reserves which is not gathered in this calculator. Information such as interest rates and pricing are subject to change at any time and without notice. Additional fees such as HOA dues are not included in calculations. All information such as interest rates, taxes, insurance, PMI payments, etc. are estimates and should be used for comparison only. Shining Star Funding does not guarantee any of the information obtained by this calculator.
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