DSCR Loans for Foreigners: How to Finance Your Property as a Foreign Investor in the USA

The US real estate market is the biggest one in the world, attracting more than 40 billion dollars of foreign investment per year. What you would be surprised to hear is that not all of that money comes from foreign sources. In fact, a good chunk of it is directly financed by US lenders, primarily because of mortgage brokers who specialize in helping nonresidents purchase US real estate. These brokers stay at the forefront of mortgage financing solutions and are always looking for new types of loans that can satisfy the needs of their international clients. 

Over the past decade or so, one specific loan type has proven to be a game changer, especially for foreign investors. We’re talking about DSCR loans, which are famous for completely transforming how foreign investors approach the US real estate market. But how did that happen, and what’s so special about DSCR loans for foreigners? Let’s find out.

What Are DSCR Loans For Foreigners?

DSCR loans, or Debt Service Coverage Ratio loans, are revolutionary investor-only mortgages originating in the US in the early 1990s. They quickly became popular with both domestic and foreign real estate investors due to their unique selling point — you can use rental income to qualify for a loan. 

Unlike other types of mortgages, where lenders will look at your credit score, history, personal assets, etc. before you can qualify, DSCR loans for foreigners mainly focus on one thing — the property’s ability to generate income (i.e., rental income). This seemingly small change had a huge impact on the entire US real estate, mostly because:

• It allowed lenders to successfully mitigate risk — if borrowers default on a loan, lenders will still be left with a property that can generate income.
• It increased the number of borrowers — when more borrowers qualify for a loan, more deals can be made, ultimately increasing lenders’ revenue.  

Another unique aspect of DSCR loans is how lenders evaluate a property’s ability to generate income — they use a metric called the DSCR score.

How To Calculate the DSCR Score?

The DSCR score evaluates the property’s ability to cover loan payments (i.e., debt obligations). There are two main ways to calculate the DSCR score — using GOI (Gross Operating Income) or NOI (Net Operating Income) for the calculation.

For the purposes of this article, we’ll only focus on the more popular method, which uses NOI. However, if you’re interested in learning more and want to see a detailed analysis of the DSCR calculation, feel free to check out the linked article. With that out of the way, let’s get back to calculating the DSCR score.

The formula most lenders will use is:

DSCR = Net Operating Income / Debt Service 

This makes figuring out the Net Operating Income our first goal. 

DSCR Loan for Foreign Nationals: Calculating NOI

You can calculate NOI by deducting all operating expenses from the total income a property can generate and then multiplying the result by 12 to get the numbers for the entire year. 

Net Operating Income = (Monthly Rental Income – Operating Expenses) x 12

Now, let’s say that monthly rental income is $3,300 and that expenses include:

• Property Tax: $250
• Property Insurance: $200
• Repairs and maintenance: $350
• Property management: $350
• Vacancy Rate: 10% $300

Adding up all the expenses, we’ll get a total of $1,450. Let’s add those numbers to the formula:

NOI = ($3,300 – $1,450) x 12 = 22,200

Now that we know our NOI is $22,200, it’s time to calculate the Debt Service.

DSCR Loan for Nonresidents: Calculating Debt Service

In order to determine the Debt Service, we have to calculate the monthly loan payments first. We can do that by using the formula: P = a (r / n), in which:

• P represents the monthly loan payment
• a represents the  loan principal
• r represents the loan interest rate
• n represents  the number of payments each year (12)

Now, let’s say that the loan principal (i.e., loan amount) is $180,000 and that the DSCR loan interest rate is 8% or 0,08 in numerals (the usual rate is for October 2024). After we put the numbers into the above formula, we’ll get that:

P = 180,000 (0,08 / 12) = 1,200

And finally, to calculate the Debt Service, we need to multiply P by the number of months in a year (12). 

Debt Service = 12 x 1,200 = 14,400

Now that we know that our NOI is $22,000 and that the Debt Service is $14,400, we can go back to the original formula and calculate the DSCR score.

Finally: Calculating the DSCR Score

To determine the DSCR score, we’ll add the numbers we’ve got and use the already-mentioned formula:

DSCR = NOI / Debt Service  

DSCR = 22,000 / 14,400 = 1,53

The DSCR score of 1,53 shows that the property can generate enough income to cover the debt service and leave borrowers with a positive cash flow. In the eyes of most lenders, a score of 1 or higher will be enough to qualify you for DSCR loans for foreigners.     

DSCR Loans for Foreigners: A Game Changer for Nonresident Investors

Before DSCR loans for foreigners became a thing, nonresident investors had a difficult time obtaining financing in the US. Foreign investors naturally lacked US credit history and scores, which were one of the easiest ways to reliably predict the borrower’s ability to repay their debts. The introduction of DSCR loans for nonresident investors changed that, as it created a new way for lenders to mitigate risk — DSCR score.

This revolutionary way of evaluating a property’s income-generating ability was all it took to drastically change how US mortgage lenders viewed foreign investors. The DSCR score gave lenders another layer of protection, which paved the way for the creation of mortgage brokerage companies that specialize in helping foreigners obtain financing in the US. And, it is precisely these companies that have opened the doors for nonresident investors and made it easier for them to get loans in the US.  

Can foreigners get DSCR loans in the US? Of course, they can, with a little help from NRI. Book a free call with our mortgage expert to learn more. 

DSCR Loan for Foreigners: Main Advantages

DSCR loans have many advantages when compared to more traditional loans, including:

Special Focus on Rental Income

DSCR loans help investors obtain financing by prioritizing a property’s income-generating ability instead of US credit score, history, or even personal income. As long as they can find a property with a high enough DSCR score (1 or above) and enough cash to cover the down payment, nonresident investors can get approved for a DSCR loan for foreigners. 

Great for Portfolio Expansion

DSCR loans for foreign nationals allow nonresidents to finance multiple rental properties at once, up to a maximum value of 2 million dollars. This characteristic of DSCR mortgages allows nonresident investors to create a diverse portfolio from scratch or quickly expand their existing one. 

Natural Risk Mitigation 

By having a strong emphasis on the property’s ability to generate income instead of the 

borrower’s finances, DSCR loans incentivize investors to focus on properties with high income potential. This, in turn, helps lower the risk for both lenders and borrowers, as properties with good income-generating ability are less likely to be negatively affected by market fluctuations.  

By emphasizing the property’s income over the borrower’s personal financial situation, DSCR loans inherently encourage investments in properties with strong income potential. This focus can help mitigate risk, as properties with robust income streams are more likely to weather market fluctuations.

Increased Structuring Flexibility and Leverage

DSCR loans offer much more flexibility in terms of loan structuring than conventional loans. Depending on the DSCR score (the higher, the better), borrowers can gain increased leverage when negotiating loan terms. Lenders will be open to discussing DSCR interest rates, loan amortization schedules, LTV (Loan-To-Value) ratios, and more. This allows borrowers to get a customized financing solution that best meets their investing needs.  

DSCR Loan for Foreign Investors: Main Requirements 

Here are some of the main requirements for a DSCR loan for nonresident investors:

Open US LCC 

Because DSCR loans for foreigners are investor-only loans, and properties you finance with them are investment properties, you’ll need to open an LLC in the US. You don’t need an LLC to get approved for the loan, but you’ll need one to purchase a rental property in the US.  

If you’re looking to invest in US real estate and need help opening an LLC in the US, NRI can help. For a fee of $1,500, we’ll take care of the paperwork, guide you through all the steps and ensure you create the best possible structure for your situation. 

DSCR Score  

Most lenders will only finance a property with a DSCR score of at least 1 or higher. However, it’s important to note that some lenders will finance properties with a score lower than 1, but will, in turn, ask for additional assurances of your ability to repay the loan. 

Down Payment 

The exact amount you’ll need for a DSCR loan down payment will depend on the lender and the property’s DSCR score. But, for the most part, DSCR loans for foreigners have a down payment between 25% to 30%.

US Credit Score and History

Even though the DSCR score adds an additional layer of protection for lenders, many will still want to see your US credit score or history. With a US credit history, you’ll have a lot more options in terms of the number of lenders willing to work with you and will probably get a lower interest rate.

However, if you don’t have a US credit score, you shouldn’t worry. You’ll still be able to get a DSCR loan for foreigners. The only difference is that you’ll have to pay slightly higher interest rates, and it will be somewhat more difficult to find a lender willing to finance your property. Your best option in this situation is to contact a mortgage broker specializing in providing financing solutions to international clients without a US credit score. 

At Least 6 Monts of Cash Reserves

Some lenders will want to see proof (usually in the form of bank statements) that you have enough cash reserves to cover at least 6 months of loan payments. These reserves can be located in any bank account, even outside the US. What’s important here is that you have them.

On the other hand, there are also lenders in the US that won’t ask you to have any cash reserves. There are few in numbers, but there are just enough of them that they are worth mentioning. In fact, these lenders use the lack of cash reserve requirement as a unique selling point to attract more borrowers.

Interest Rates

The latest interest rates for a DSCR loan for foreigners are usually between 6% and 8% (for October 2024). This is a bit higher when compared to more traditional loans, which is kind of expected due to how DSCR loans work. 

Now, we should also note that the exact rate is not fixed and will depend on many factors, such as:

• The specific lender you’re working with 
• The loan amount 
• The loan term length 
• The down payment

1007 Rent Schedule Form 

The 1007 form is a standardized document used to appraise the rental income of a specific single-family or small residential property. Most lenders will hire appraisers independently to ensure your rental income projection matches theirs.

Proof of Assets 

Lenders will require evidence in the form of financial documents (such as bank statements, tax reports, etc.). To ensure you have enough money for the down payment, closing costs, and, in some cases, various other expenses (e.g., taxes).  

Legal and Identification Documents 

Lenders will require you to have some documents that prove your identity, like a valid passport, driver’s license, or national identity card. Additionally, having a US visa or any sort of legal status in the country can prove beneficial and might get you a better deal on your mortgage.