DSCR Loans in Massachusetts - No Income Required for Real Estate Investors

What is a DSCR Loan in Massachusetts?

A DSCR (debt service coverage ratio) loan is a type of non-qualified mortgage specifically designed for real estate investors in Massachusetts who want to purchase or refinance an investment property. Unlike conventional mortgages, DSCR loans are not based on the borrower's income, but rather on the projected cash flow of the property itself.

How Does a DSCR Loan Work?

With a DSCR loan, lenders look at the net operating income (NOI) of the property and calculate if it is enough to cover the proposed mortgage payment. This ratio of NOI to mortgage payment is called the debt service coverage ratio (DSCR).

For example: If the NOI of the property is $60,000 per year and the proposed annual mortgage payment is $48,000, the DSCR would be 1.25 ($60,000/$48,000). This means the NOI covers the mortgage payment by 25%.

Lenders typically want to see a minimum DSCR of 1.20 to 1.25. The higher the DSCR, the more confident they are that the property income can support the loan.

Benefits of a DSCR Loan

A DSCR loan offers several benefits for real estate investors in Massachusetts:

• No income verification - The investor's personal income is not considered.
• 100% financing available - Both purchase and refinance with no down payment.
• Interest-only payments - Keeps payments lower.
• Longer terms - Up to 30 year amortizations.
• Non-recourse - The borrower has limited personal liability.

This type of loan allows investors to buy or refinance investment properties based solely on the property's potential income, not their own income. The lender focuses on the strength and viability of the investment property itself.

DSCR Loan Requirements

When applying for a DSCR loan, the borrower must demonstrate:

• A minimum 680 credit score.
• The property must generate sufficient income.
• Debt service coverage ratio of around 1.25 or higher.
• Six months property reserve including mortgage payments.
• Bank statements to show reserves.
• Clean background - no recent foreclosures or bankruptcies.

The property should have a successful rental history with long-term tenants, low vacancies and steady cash flow. Multi-family properties with 5+ units are preferred.

Documents Needed

Documents required for a DSCR loan include:

• Property purchase contract or refinance estimates.
• Last two years tax returns for LLC or entity owning property.
• Current rent roll and copies of leases.
• Documentation of income, expenses, reserves for property.
• Property inspection report.

Having detailed records showing consistent income and occupancy will help demonstrate the stability of the property.

Advantages of Using a DSCR Loan

There are many advantages to using DSCR financing to purchase or refinance investment property in Massachusetts:

Purchase With Less Cash

A DSCR loan allows investors to leverage the property's income potential to secure financing, so they do not need a down payment or to inject as much of their own cash into a purchase.

Tap Into Equity

Refinancing with a DSCR loan allows investors to access their property's built-up equity for other investments or to fund repairs and upgrades to the property.

Lower Monthly Payments

Interest-only DSCR loans offer lower monthly payments since you are only paying the interest, not principal. This improves cash flow.

Buy More Properties

With loan approval based on property details rather than your personal income, a DSCR loan allows you to build and expand your real estate portfolio faster.

Improve Property Performance

Drawing equity out through a refinance provides funds for value-add upgrades like renovations that will improve the property's performance and income.

Risks of a DSCR Loan

While they provide great flexibility, DSCR loans also come with some risks to consider:

Personal Guarantee Required

Most lenders will require a personal guarantee from the borrower even though the loan is technically non-recourse. This results in some personal liability.

Variable Rates

DSCR loans often come with variable interest rates that can rise and cause payments to go up over time.

Shorter Term

Compared to conventional mortgages, DSCR loans typically have shorter 5- to 10-year terms so the loan will need to be refinanced more frequently.

Prepayment Penalties

Borrowers need to be aware of any prepayment penalties should they want to refinance or sell the property before the loan term is up.

Financial Diligence

The lender will carefully analyze property financials, so any drop in NOI could threaten your ability to qualify for a loan or refinance when the term ends.

Finding the Best Massachusetts DSCR Lender

The key to success with DSCR financing is finding an experienced lender who can walk you through all the requirements and documentation. Look for a lender who offers:

• Competitive interest rates and fees.
• Flexible loan terms and amounts.
• A transparent application process.
• A quick loan decision.
• Excellent customer service.

Be sure to shop around and compare options from different lenders. A knowledgeable broker can help you find the best DSCR loan product and lender for your particular situation.

Are You Ready to Explore DSCR Financing?

If you want to purchase or refinance investment property in Massachusetts, a DSCR loan can provide flexible financing options with less dependence on your personal income and finances. Connect with a specialist lender to learn more about DSCR loans and determine if this type of non-qualified mortgage is a good fit for your real estate investment goals and portfolio.

FAQs

What is a DSCR loan?

A DSCR loan is a type of financing for real estate investors that looks at the property's projected net operating income rather than the borrower's income to qualify for the loan. The focus is on the profitability of the investment property.

What is the minimum DSCR ratio required?

Most lenders require a minimum DSCR of 1.20 to 1.25. This means the property's net operating income must be at least 1.20 to 1.25 times higher than the proposed mortgage payment.

What properties qualify for a DSCR loan?

DSCR loans work best on stable, income-producing properties like multi-family apartments, office buildings, retail centers, etc. Unique or partially vacant properties may not qualify.

How long is the loan term on a DSCR loan?

DSCR loans typically have a shorter 5- to 10-year term compared to 15-30 years for conventional mortgages. They will need to be refinanced more frequently.

Can a DSCR loan be used to purchase investment property?

Yes, a DSCR loan can provide financing for real estate investors to purchase investment properties with less cash out of pocket compared to conventional loans.