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Landlord loans ignore your income
What DSCR means
DSCR stands for debt service coverage ratio. It is a commercial mortgage built for people buying a home to rent out, and it runs on the same logic as the loans developers use to build office towers and apartment complexes: the lender mainly cares whether the income from the project will cover the debt payments. For a DSCR loan, lenders focus on the landlord's credit score, an appraisal of what the home is worth, and the estimated monthly rent. If that rent looks big enough to cover the mortgage payments, the loan is approved.
Why it is legal
The no-income feature is legal because DSCR loans count as business-type loans, which sit outside most of the rules Congress passed after the financial crisis. Those rules largely outlawed NINJA loans, which stood for no income, no job, no assets, no problem, and required mortgage lenders to check income, assets, and credit history. Lenders can charge a higher interest rate on a DSCR loan than on a traditional mortgage, and in theory there is no limit on how many houses one borrower can finance this way.
The weak spot
Lenders who make these loans see no reason to look at the borrower's income, since the property's income is what the loan is made against. The weak spot is the appraisal report that estimates the rent, which in some cases is one person's guess at how much a house will rent for.
Why do business loans escape mortgage rules?
The main post-crisis consumer mortgage rules came from the Dodd-Frank Act of 2010 and apply to credit extended primarily for personal, family, or household purposes. A loan made to buy a rental house is classed as a business-purpose loan, so it generally falls outside those rules. The Consumer Financial Protection Bureau's ability-to-repay requirement took effect in January 2014. It requires lenders to make a reasonable, good-faith determination that a consumer can repay the loan.
Why did no-income loans spread before 2008?
Before 2008, many lenders sold their mortgages to investors soon after making them. Because the lender did not keep the loan, checking a borrower's income carefully mattered less to the lender's own results. Loans with little or no documentation grew through the mid-2000s, and the Financial Crisis Inquiry Commission's 2011 report cited weakened lending standards as a central cause of the crisis.
Why do commercial lenders want rent above payments?
Commercial lenders measure the debt service coverage ratio, which divides a property's annual net income by its annual loan payments. A ratio of 1.0 means income exactly covers the payments, leaving nothing for vacancies or repairs. Lenders therefore ask for a cushion above that line. Commercial lenders commonly ask for a ratio around 1.2 to 1.25.
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