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Derek Bissen, November 29 2023

Getting Preapproved for a DSCR Loan: The #1 Most Important Factor You Need to Know

Are you ready to dive deeper into the world of DSCR Loans? As a property investor, whether seasoned or just beginning, grasping the essentials of Debt Service Coverage Ratio (DSCR) loans is a pivotal step in mastering the real estate investment landscape.

The #1 Qualification Factor for DSCR Loans

The first and foremost thing to know about qualifying for a DSCR loan is a simple yet crucial requirement: YOU MUST ALREADY OWN YOUR OWN PRIMARY RESIDENCE. 

This wasn't always a stringent condition, but recently, Federal mortgage regulators have heightened their focus on these loans, likely due to their growing popularity.

Why All the Fuss on DSCR Loans?

The interest in DSCR loans stems from their unique position in the mortgage world. They sidestep a fundamental aspect of mortgage law. Those who remember the 2008 mortgage crisis might recall programs like “stated income” or “no income” loans, infamously dubbed “liar’s loans.”

Post-crisis, the mortgage industry was reformed under the Dodd-Frank Act, outlawing such practices by instituting the Ability-To-Repay standard. This standard, applicable to primary and second homes, mandates lenders to verify borrowers’ financial capacity to repay the loan, marking the birth of Qualified Mortgages (QM loans like Conventional, FHA, VA, and USDA loans).

The Role of Non-QM in DSCR Loans

“Non-QM” or Unconventional mortgages step outside the traditional framework. They still assess a borrower's repayment ability but use alternative means instead of tax returns. This is where DSCR loans make their mark. They are Non-QM loans designed exclusively for business-purpose investment properties. These loans are tailored for scenarios where you, the investor, do not occupy the property but act as a landlord.

Legal Implications and Regulatory Attention

By not occupying the investment property, you miss out on various protections like Federal, State, and local homestead laws, a topic too intricate for this brief overview. However, it's crucial to understand that Federal regulators are keenly aware of DSCR programs. They emphasize that these loans must be used strictly for their intended investment purposes.

Avoiding Fraud in DSCR Loans

As of 2023, the top fraud in the mortgage industry is “Fraud for Property,” with Occupancy fraud being a prime example. The temptation in DSCR loans is to falsify applications to obtain a loan for a home that might be unaffordable by conventional standards. Since DSCR loans hinge on rental income for qualification, living in the property yourself, hence lacking tenant-generated rent, defeats the loan's purpose.

The Homeownership Requirement

Owning your home is a prerequisite for DSCR loans. It indicates your familiarity with the responsibilities of homeownership before taking on the added duties of a landlord. This includes managing tenant payments, property upkeep, and other expenses.

Exceptions and Stringent Criteria

While exceptions exist, allowing renters to obtain DSCR loans, the criteria are stringent. Typically, you must provide an active lease from an institutional landlord (think apartment complexes or real estate management companies, not individual landlords). Additionally, proof of the last 12 rent payments is often required. It's exceedingly rare, if not impossible, to secure a DSCR loan while living rent-free with family.

Setting Yourself Up for Success

If you already own a home, you're on the right path towards DSCR loan approval. If not, discussing this upfront with your lender is essential for saving time and ensuring successful loan acquisition.

As we wrap up, remember that understanding the nuances of DSCR loans is key to making informed decisions in real estate investment. If you're considering using a DSCR loan for your next investment, remember that diverse programs and extensive experience are vital.

How to Run Your Own DSCR Scenarios

Utilize our free tools like our own DSCR CALCULATOR to run your own loan scenarios for potential investments.

We lend in 29 states and aim to be your preferred lender for current and future real estate transactions. We're here to support your journey! Simply give us a call so we run some numbers for you and answer all your questions!

You can also drop us a line HERE »

Yours in successful homeownership,

Derek Bissen
Loan Originator
Unconventional Lending Program Director


Derek Bissen is a licensed Mortgage Loan Originator with over 25 years of experience in the industry. Derek is a self-employed lending expert who is known for his ability to work with borrowers who have substantial wealth and non-traditional lending needs. He is a creative loan structurer and specializes in portfolio lending, asset-based lending, bank statement lending, as well as traditional loans such as Conventional, FHA, VA, and first-time homebuyers.Derek's expertise in the mortgage industry is unparalleled. He is a trusted advisor to his clients, providing them with customized loan solutions that meet their unique financial goals and needs. His vast experience and knowledge make him a valuable asset to anyone looking to purchase a home or refinance their existing mortgage.As a highly-experienced loan originator and author, Derek is committed to sharing his knowledge with others. He regularly provides valuable insights and advice to readers looking to navigate the complex world of mortgage lending. His articles are informative, engaging, and backed by years of hands-on experience.With his wealth of knowledge and dedication to his clients, he is the go-to source for all your mortgage lending needs. If you're looking for a reliable and trustworthy mortgage expert, contact Derek today to learn more about how he can help you achieve your financial goals.

Written by

Derek Bissen

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