The nation’s second largest mortgage lender has begun offering DSCR loans for its customers.
The loans, which are reserved for real estate investors, have exploded in popularity in recent years because they allow borrowers to qualify based on the property’s cash flow.
This means borrowers don’t need to provide personal income documentation or tax returns to qualify.
As such, they can get approved simply by showing that the rental income from the subject property is sufficient to cover the monthly housing expense.
The new loan product will be available via both the retail channel and through Rocket Pro, the company’s wholesale arm for mortgage brokers.
How DSCR Loans Work
The DSCR loan, which stands for Debt Service Coverage Ratio, allows a real estate investor to utilize the property’s cash flow instead of personal income.
They are available on non-owner occupied properties, such as an investment property or a short-term rental (STR) offered via platforms like Airbnb.
This means the borrower doesn’t need to supply income documentation and calculate a debt-to-income ratio (DTI). In other words, “simple qualifying.”
Aside from being less cumbersome for the borrower, it might also mean it’s easier to qualify for the loan.
Many real estate investors have complicated taxes and uneven earnings throughout the year (or across multiple years).
The DSCR loan puts the emphasis on the property itself and reduces scrutiny on the borrower.
However, lenders do often impose minimum ratios to ensure the loans are sound and likely to perform.
When it comes to Rocket Mortgage, they are imposing a minimum DSCR of 1.0. this means the property cash flow must be at least as high as the monthly housing payment.
Typically, this includes the principal, interest, taxes, insurance, and HOA dues if applicable.
For example, say you want to buy a condo in a ski town and rent it out on Airbnb and VRBO.
If the PITIA comes out to $4,000 per month, the unit must rent for at least $4,000 per month as well to ensure it passes underwriting.
But imagine the PITIA is $5,000 and the cash flow is only $4,000. Then you would have a DSCR of just 0.80.
Some lenders may not approve the loan if the DSCR is that low, or they may require compensating factors such as a higher FICO score, larger down payment, smaller loan amount, etc.
Rocket Mortgage DSCR Loan Requirements
As noted, Rocket Mortgage’s requirement on this new product is a DSCR of at least 1.0.
So the cash flow must meet or exceed the monthly housing obligation in order to get approved.
In addition, Rocket is imposing a minimum credit score of 680 and a maximum combined loan-to-value ratio (CLTV) of 80%.
That means real investors need to come in with at least a 20% down payment, which is common to provide a safety buffer.
Because the borrower’s income isn’t necessarily documented, having a sizable amount of skin in the game is important.
This is kind of the saving grace of these loans relative to the questionable stated income loans offered in the early 2000s before the massive mortgage crisis took place.
It makes me feel better about these types of loans knowing the homeowners have something to lose if things go sideways.
Back then, you could get an investment property with zero down and a low credit score, all while stating your income or providing no income at all!
Rocket will allow loan amounts as large as $3 million and their DSCR loan is available on 1-4 unit investment properties, condos (both warrantable and non-warrantable), along with long-term rentals (LTRs) and short-term rentals (STRs).
They also permit closing DSCR loans in an LLC for tax advantages, asset protection, and streamlined property management.
Their crosstown rival United Wholesale Mortgage (UWM) began offering DSCR loans back in 2023.
They have even more aggressive lending guidelines, including a minimum debt service coverage ratio of 0.00 (no ratio) and credit scores down to 640.
