What are Debt Service Coverage Ratio (DSCR) Loans?
DSCR loans are specialized mortgage products meant to fund investment opportunities. They rely on the DSCR ratios of rental properties to determine whether the property can cover its debt obligations, such as mortgage payments.
This focus on profitability means that DSCR lenders don’t require income verification, such as tax returns, job history, and bank statements, making them an attractive option for self-employed Colorado borrowers and investors.
What Does DSCR Measure?
The Debt Service Coverage Ratio analyzes the ratio between a rental property’s net operating income and its debt service. This identifies whether the subject property is making sufficient profit to cover the mortgage and other homeownership costs after all business expenses have been accounted for.
Net Operating Income (NOI) vs. Debt Service Obligations
Net operating income is the rental income minus expenses like property management, maintenance, repairs, landscaping, taxes, and insurance. To find NOI, you identify the property’s income, and then subtract all the business expenses.
On the other hand, debt service focuses on the expenses associated with homeownership, including principal and interest payments, taxes, insurance, and homeowners association dues.
Determining Your Property's Income-Generating Potential
To calculate DSCR, divide the NOI by the debt service, providing you with a ratio. A negative ratio means that your property can’t cover its mortgage, while a ratio of 1 means your rental property is breaking even.
Most lenders want to see a ratio of 1.25 or better, as this shows you’ll still be turning a good profit after paying your loan and other costs.
DSCR Loans
Colorado
Colorado real estate investors can afford the rental property of their dreams with DSCR loans!
Unlike traditional mortgages, Debt Service Coverage Ratio (DSCR) loans allow you to purchase rental properties based on the property’s ability to generate income rather than your personal borrowing profile. Perfect for full-time investors and self-employed borrowers, rental loans offer flexible underwriting guidelines and larger maximum loan amounts.
Why Choose DSCR Loans?
Colorado real estate investments offer incredibly favorable cash flow potential; the median monthly rental income for a long-term rental is a fantastic $2,294, while vacation rentals in Fort Collins, Grand Junction, and Colorado Springs can net over $20,000 in annual profits.
A DSCR loan product is an excellent way for Colorado investors to benefit from the high property value in the Centennial State, thanks to its unique approval guidelines and flexible underwriting options.
Focus on Property Cash Flow, Not Personal Income
Conventional mortgages need specific information for approval, which includes things like W2s, pay stubs, and bank statements. A real estate investor who makes most of their income through property may not have this documentation.
Because DSCR loans are interested in the viability of the property rather than the borrower, they’re a good option for investors who may not be able to access other loans due to the strict underwriting requirements.
Easier Qualification for Investors With Multiple Properties
Conventional loans are geared toward residential real estate, mostly single-family homes; you can only purchase one property with one loan.
With a Colorado DSCR loan, you can roll several properties into a single loan, making it easier to expand your portfolio quickly. You’ll have streamlined payments and pay the same interest rate for each of your properties.
Potential for Higher Loan Amounts
The maximum loan amount for a conforming loan in Colorado ranges from $766,550 to $1,149,825, which may be insufficient for high-value real estate in attractive areas.
Thankfully, some DSCR lenders can extend up to $5 million, allowing you to purchase pricier investment properties that have strong profit potential.
Flexible Underwriting Guidelines
Not only can you access more funding, but DSCR loans in Colorado have the added advantage of more flexibility in underwriting. You can work with the lender to identify what information they need, and there’s more room for negotiation than for other mortgage options.
Quicker Closing Times Compared to Traditional Loans
Thanks to the lower documentation requirements, DSCR loans can close much faster than other mortgage products. This is crucial for an investor who needs to act quickly to secure the most lucrative properties in the highly competitive Colorado market.
DSCR Loan Requirements in Colorado
Real estate investors need a minimum credit score higher than for other mortgage products, though this is one of the few investigations into a borrower’s financial history. The minimum loan amount is usually between $75,000 and $100,000, as lower-valued properties may not generate enough profit to justify the loan.
There are several other qualifications for DSCR loans in Colorado, including the following.
Minimum DSCR Ratio
Your Debt Service Coverage Ratio is the primary consideration when applying for these rental loans. Typically, lenders will expect a ratio of 1.25 or higher, meaning that you are making 1.25 times the mortgage in rental income less expenses.
Property Type
Only investment properties can qualify for a DSCR loan. They primarily focus on the more lucrative residential rental properties, though it is possible to get funding for property types like hotels, cafes, and shopping malls.
Down Payment Requirements
The minimum down payment for a DSCR loan is usually 20%, though you may be able to find lenders that will accept as low as 10%.
Appraisal and Inspection Requirements
Your rental properties will need to go through more than one appraisal to ensure that the purchase price matches the market value. Inspections are also mandatory, while they may be optional for conventional loans.
Understanding DSCR Calculation
This type of loan hinges upon whether the DSCR calculated is high enough to justify the loan. It’s a simple calculation that divides NOI by debt service to see whether the gross monthly income can cover the mortgage and other associated home costs.
Net Operating Income and Total Debt Service
NOI is the rental income minus the business expenses like maintenance and property management, while debt service is the mortgage, taxes, insurance, and association dues. You then divide NOI by debt service to get the DSCR of the subject property.
For example, assume that your NOI is $350,000 and your debt service is $300,000. When you divide this, you get a ratio of 1.16, which may not be high enough to get a DSCR loan.
To boost this ratio to 1.25, you’d need to raise your NOI by $25,000. You could do this by raising the rent, adding more amenities, or making improvements.
Who Benefits From Colorado DSCR Loans?
With DSCR loans, Colorado borrowers access the funds they need to compete in this strong market, which includes investors, self-employed borrowers, and entrepreneurs with large portfolios.
Real Estate Investors
Many borrowers turn to short-term loans like hard money loans, but these can be very difficult to repay due to the high interest rate, short term, and balloon payments. In contrast, DSCR loans have longer terms, lower interest rates, and predictable payments.
Self-Employed Borrowers
Even borrowers who can afford a large down payment may find themselves unable to access loans because they lack the necessary documentation. DSCR loans rely on the property’s profit potential rather than personal income, making them easier for entrepreneurs to qualify for.
Borrowers with Multiple Properties
These rental loans allow you to expand your real estate portfolio quickly because you can buy several properties with a single loan. Not only does this make your monthly payments more affordable, but it also allows you to stay competitive in hot markets.
The DSCR Loan Process
Because of the lower documentation, DSCR loans have a much simpler approval process, which includes the following steps.
Find a Lender – These products are only available from specialized lenders. We’ll help you find the most reputable companies that meet your needs.
Get Pre-Approved - The pre-approval process requires a simple asset check and a credit report rather than personal income documentation.
Find a Property - To get the best results, Work with a realtor familiar with real estate investors' needs.
Apply for a Loan - In this step, the lender calculates the DSCR by ordering appraisals and examining the property’s history and profit potential.
Underwriting – An underwriter will double-check that all facts are correct and ask for additional details if necessary.
Approval and Close - This is when you sign the paperwork and officially take control of the investment property.
Why Choose Pride Lending for Your Colorado DSCR Loan?
Our team is dedicated to helping LGBTQ real estate investors and other underserved populations break into the hot Colorado market. We’ll help you find great lenders with competitive rates for your specific needs, assisting you every step of the way.
Pride Lending’s loan officers have years of experience in these specialized loan products and will offer you helpful advice along the way. Our fantastic customer service will help even a first-time investor feel confident with their options.