What are Debt Service Coverage Ratio (DSCR) Loans?
Debt Service Coverage Ratio (DSCR) Loans are an alternative source of financing that determines eligibility based on potential property income rather than current income. DSCR loans are ideal for Arkansas real estate investors with limited cash flow.
What Does DSCR Measure?
DSCR eligibility depends on the borrower’s net operating income (NOI) versus existing debts. The loan amount also depends on how much revenue the property can generate, not the investor’s current income or debt-to-income (DTI) ratio.
Net Operating Income (NOI) vs. Debt Service Obligations
Net operating income is the property’s rental income, or how much an investor can expect to bring in per month or year through rent payments. Debt service obligations are the borrower’s current debt in relation to the property. Essentially, this ratio tells lenders whether or not the borrower has or will have sufficient income to cover debt payments.
Determining Your Property's Income-Generating Potential
Determining your property’s rental income is essential in evaluating DSCR loan eligibility. Lenders won’t approve a loan that costs more per month than it can realistically generate. Reviewing the local market, including historical rental rates, can be helpful when considering a real estate investment.
Of course, it’s also essential to consider the other property expenses. A portfolio expansion also means loan interest, insurance, taxes, property management fees, repairs, and maintenance. A DSCR lender will consider all these fees when determining income potential and a borrower’s ability to repay the mortgage.
DSCR Loans
Arkansas
Many Arkansas markets offer ample investment opportunities. A growing population and steady demand for housing set the tone for a profitable Arkansas real estate market in which investors can significantly benefit.
Funding an investment property is one of the most significant barriers to real estate. Traditional financing options consider a borrower's income versus debt; for many, an investment property is in addition to another mortgage.
These standards can make qualifying for another loan unrealistic for many Arkansas borrowers and investors. A Debt Service Coverage Ratio, or DSCR loan, offers financing to investors based on a property’s potential income rather than existing income.
Why Choose DSCR Loans?
Arkansas DSCR loans are an excellent option for real estate investors with limited cash flow. Here are a few of the most significant benefits of a DSCR loan.
Focus on Rental Property Cash Flow, Not Personal Income
DSCR loan eligibility primarily depends on the projected income of a rental property rather than the borrower’s income. The purchase price or loan amount isn’t as important as the income potential. A lower-cost property will generate less revenue, and a higher-priced home will earn more.
Easier Qualification for Investors With Multiple Properties
The application process and qualification requirements for a DSCR loan can be less stringent than those of other loan types, especially for nontraditional buyers. A Pride Lending DSCR lender can help interested investors review the eligibility requirements.
Potential for Higher Loan Amounts
DSCR loans can be a great way to acquire a rental property with a higher value. Real estate investors may be limited to rental properties within their maximum loan amount based on their current income. Since DSCR loans only consider potential rental income and higher-valued rental properties typically generate more, investing in higher-valued properties is more of a reality.
This can sometimes lead to more profitable real estate investments. Arkansas cities with higher property values may be more in demand. Cities like Little Rock can typically earn more rental income than rural cities but also have higher investment prices. Commercial real estate investments also tend to be more expensive.
Flexible Underwriting Guidelines
Arkansas DSCR loans typically have more flexible underwriting guidelines. Qualifying for a DSCR loan doesn’t usually require income statements or tax returns. Of course, factors like minimum credit score and interest rate depend on the mortgage broker, too. Regarding Arkansas investing, work with a knowledgeable real estate investor.
Quicker Closing Times Compared to Traditional Loans
The time it takes to close a DSCR loan can be much faster than other loan types. A faster loan processing time can help real estate investors succeed in the competitive Arkansas market. Rental properties come and go on the market quickly, and getting held up in financing can lead to a lost sale.
DSCR Loan Requirements in Arkansas
DSCR loans have specific eligibility requirements, which include the following:
A DSCR ratio of at least 1.25 or higher
The purchase of a property to generate income
A down payment between 20% and 25%
Completion of an appraisal and inspection
Minimum DSCR Ratio
Most DSCR lenders require a 1.25 ratio or higher, varying depending on the lender. A DSCR ratio refers to the property’s earning potential compared to its expenses.
Property Type
DSCR loans are a nontraditional loan type designed for real estate investments. Since DSCR loans depend on rental income, borrowers seeking a primary residence won’t typically qualify.
Otherwise, DSCR loans in Arkansas are available for many property types, including single-family, multi-family, mixed-use properties, and student housing. Short-term rentals are also eligible for a DSCR loan. Arkansas has many tourist-filled cities, including Eureka Springs and Little Rock, which can be ideal for a profitable short-term rental. DSCR loans in Arkansas can also finance commercial real estate projects. There may also be a minimum loan amount, which will vary based on the lander.
Down Payment Requirements
DSCR loans in Arkansas require a down payment, usually between 20% and 25%. Many lenders also require borrowers to show proof of cash reserves to cover a few months of mortgage payments and other expenses.
Appraisal and Inspection Requirements
Most DSCR lenders require an appraisal and inspection. Lenders want to confirm that the intended property appraises for the loan amount and is in good working condition. Loan eligibility depends on the property’s rental income, so the DSCR lender checks that it’s in good enough condition to earn income.
Understanding DSCR Calculation
A DSCR calculation is what lenders use to determine loan eligibility and amount.
Net Operating Income and Total Debt Service
Calculate the DSCR ratio using the following formula:
Net Operating Income (NOI) / Total Debt Service = DSCR Ratio
Add up the property’s potential rental income, which is your NOI. Then, divide that by the total debt service, which is the cost of maintaining and upkeeping the property. This might include monthly mortgage payments, insurance, HOA fees, maintenance, and upkeep.
For example, say you purchase a property in Little Rock after learning about the city’s economic stability and job opportunities. You decide to buy a single-family property in a community with steady growth. After researching the Little Rock area, you find that a $1,800-month rent payment is realistic, earning you $21,600 annually.
You then add up your expenses. The loan amount you chose with the interest rate you secured will cost you $1,200 monthly. You also calculate insurance, taxes, and upkeep costs and determine that your annual debt obligations are $16,400.
$21,600 / $16,400 = 1.31 DSCR ratio
A 1.31 DSCR ratio may meet the eligibility requirements for a DSCR loan in Arkansas with some lenders. However, some lenders may require a higher ratio to qualify.
Who Benefits From DSCR Loans?
DSCR loans in Arkansas offer financial flexibility, enabling investors to base loan eligibility on potential income rather than existing income. DSCR Loans benefit the following borrower types.
Real Estate Investors
DSCR loans benefit real estate investors, especially those with limited cash flow. Potential investors can pursue investment opportunities based on the income generated from an investment rather than personal income. Arkansas DSCR loans are one of the most popular loan programs among investors.
Self-Employed Borrowers
Self-employed borrowers can also benefit from DSCR loans in Arkansas. Small business owners or independent contractors may need the necessary documentation to verify income, which typically includes pay stubs and tax returns. DSCR loans provide self-employed borrowers another option for financing an investment property.
Borrowers with Multiple Properties
Traditional loans consider existing debt related to personal income when determining eligibility. Borrowers with multiple properties may exceed these financing requirements, making it difficult to qualify for a loan. An Arkansas DSCR loan allows existing investors to diversify portfolios by acquiring new properties.
The DSCR Loan Process in Arkansas
If you’re considering investing in Arkansas, you might benefit from a DSCR loan. Arkansas residents can expect the following of the DSCR loan process:
Contact Pride Lending - Get started with DSCR loans in Arkansas by contacting Pride Lending.
Apply for a DSCR Loan - Submit your application for a DSCR loan in Arkansas using our easy online form.
Submit Documentation — Required documents for a DSCR loan might include an application, credit authorization, bank statements, and property insurance. You will also need to provide information about your plans for the Arkansas property, including your proposed lease and rental history.
Close the Loan - Once underwriting is complete, you and your lender will close the loan and transfer the funds.
Why Choose Pride Lending for Your Arkansas DSCR Loan?
Pride Lending offers DSCR loans in Arkansas for current and aspiring investors who want to purchase new property. Arkansas provides a promising environment for entrepreneurs and business owners, and Pride Lending connects buyers to the loans they need to make these plans a reality.
We have in-depth knowledge of the local real estate market and are qualified to connect you to the best loans in Arkansas. We provide customized solutions for the most unique of buying situations.
In addition to DSCR loans in Arkansas, Pride Lending offers a variety of other loan types. Our team is ready to answer all your questions about buying. We work hard to secure competitive interest rates and customize the buying process for each Arkansas buyer.
Take The Next Step With Us!
Are you ready to learn how a DSCR loan in Arkansas can help set a solid foundation for your real estate portfolio? As a dedicated team of mortgage lenders serving Arkansas buyers, we’re committed to helping you close the sale. Have questions about the process? Our team is here to help you through every step of the process.
Take the first step and apply for pre-approval using our online form, or contact our Pride Lending team today at 725-231-0192.