What are Debt Service Coverage Ratio (DSCR) Loans?
A DSCR loan is ideal for investors who care primarily about cash flow. Unlike traditional loans, DSCR loans can be acquired without the lender considering personal income. Instead, lenders will evaluate the rental income from the property to determine if it can cover all expenses and debts.
What Does DSCR Measure?
The debt service coverage ratio refers to the relationship between the net operating income and the total debts associated with financing the property. To calculate DSCR, you divide NOI by the total debt obligations for the property. A ratio of at least 1 demonstrates that the property can be profitable.
Net Operating Income (NOI) vs. Debt Service Obligations
Net operating income is the difference between gross total income and operating expenses. Gross income includes the rental income and other sources of cash, such as laundry fees or parking fees. Operating expenses include property taxes, rental insurance, maintenance, utilities, and other costs. NOI is divided by the debt from the loan to determine DSCR, which consists of the principal, interest, and mortgage insurance.
Determining Your Property's Income-Generating Potential
When you calculate the debt service coverage ratio, you want to see a number that is well above 1. You can also use other metrics to calculate income potential. Capitalization rate is another option, which is calculated by dividing NOI by the purchase price. This gives you insight into the property’s returns outside of financing.
DSCR Loans
Georgia
Real estate investors in Georgia need financing options when they plan to buy rental properties. Conventional loans can be challenging to qualify for, whether you are just starting your investment portfolio or building it out. Luckily, there are other options.
The Perfect Loan For Investors
A debt-service coverage ratio loan is an alternative financing strategy that many investors in Georgia have used to build their portfolios. DSCR loans are based more on the property’s income potential rather than the borrower’s financial situation.
Why Choose DSCR Loans?
There are many reasons why real estate investors should consider Georgia DSCR loans to build their portfolios. Here are some of the advantages of a DSCR loan.
Focus on Property Cash Flow, Not Personal Income
Personal income can be a barrier to financing solutions with conventional home loans. Most lenders will assess your income in great detail. With a DSCR loan, lenders will be primarily concerned with the property’s cash flow instead.
Easier Qualification for Investors With Multiple Properties
If you are an investor with other properties, a DSCR loan is more accessible for you to qualify for. Your other rental properties will make generating a down payment on another DSCR loan easier, so getting approved for additional loans is simpler.
Potential for Higher Loan Amounts
Some real estate investors want to buy larger properties or complexes, but loan terms for a jumbo mortgage are challenging to manage. With home prices rising by 4.6% in the past year, a better financing solution is needed for larger purchases. A Georgia DSCR loan allows you to borrow higher amounts because it's based on the potential rental income of the property.
Flexible Underwriting Guidelines
Depending on the lender you choose for your DSCR loan, their underwriting guidelines are often more flexible than traditional loan programs. Depending on your financial situation, there is more wiggle room to qualify for DSCR loans.
Quicker Closing Times Compared to Traditional Loans
DSCR lenders can move quickly through the approval process since there is less data to sift through. The result is a streamlined approval that provides you with quicker closing times to buy your next rental property.
Georgia DSCR Loan Requirements
Acquiring a Georgia DSCR loan is a little easier for residential investment properties than a similar conventional mortgage. However, you must still meet some requirements to qualify for a DSCR loan.
Minimum DSCR Ratio
The minimum ratio will vary from lender to lender, but generally, lenders want to see a DSCR of 1.25 or greater. This provides some extra cushion in case the property has vacancy issues.
Property Type
Not every lender will give out Georgia DSCR loans for any type of property. Some only approve them for single-family homes, while others will provide funds for larger residential properties or even commercial properties.
Down Payment Requirements
DSCR loans are riskier for lenders, so they have stricter requirements for down payments. Typically, you will experience a minimum down payment requirement of 20% or 25%.
Appraisal and Inspection Requirements
Your financing firm needs to ensure the money they are giving you is worth the actual costs of the rental property so they know it can generate income. Therefore, they will require a professional appraisal and inspection before approving your Georgia DSCR loan.
Understanding DSCR Calculation
If you want DSCR loans in Georgia to purchase rental properties, the ratio is typically calculated on an annual basis. The net operating income for the year is divided by the annual debt service, which is everything related to the loan debt.
Net Operating Income and Total Debt Service
For example, say the property you are interested in can generate $100,000 in NOI each year from rental income. The total debt for the year, which includes principal, interest, and mortgage insurance, is $80,000. Your DSCR would be 1.25, which many lenders would accept for a DSCR loan to buy the subject property.
Who Benefits From DSCR Loans?
DSCR loans are very effective tools for building an investment portfolio. The following parties will benefit the most from these mortgage products.
Real Estate Investors
Real estate investors who want to earn a rental income should undoubtedly consider DSCR loans. Since these loans are based on cash flow rather than personal finance, qualifying is easier if you meet the minimum credit score and down payment requirement. DSCR loans can work whether you are a new investor or already own numerous properties.
Self-Employed Borrowers
If you are self-employed, pay stubs are not always consistent. This could deter a lender from approving a traditional mortgage. DSCR lenders will evaluate the assets themselves to determine if providing that funding is safe. There is no need to provide constant paychecks, bank statements, and personal tax returns to the loan officer for months on end.
Borrowers with Multiple Properties
The more properties you own, the easier it is to build your portfolio with DSCR loans in Georgia. It is easier to afford down payments with other properties that generate income, plus lenders will see that you have a history of paying back debts. A DSCR loan is an excellent strategy to scale up your portfolio quickly.
The Georgia DSCR Loan Process
Pride Lending is prepared to guide you through the DSCR loan process. We specialize in serving LGBTQ+ and minority individuals interested in buying rental properties. Here are the steps a typical borrower will go through.
Choose a lending partner with expertise in Georgia DSCR loans like Pride Lending to help you navigate the complexities of investment property financing.
Apply for the loan through our streamlined online process, which features flexible underwriting guidelines.
Shop for potential properties and calculate their DSCR metrics to evaluate each property’s ability to generate NOI.
Once you make an offer on a property, your loan will go through the finalization process to prepare for closing day so you can finalize the purchase.
Once the closing date arrives, your money will be provided and cover the purchase of the investment property to grow your rental portfolio.
Why Choose Pride Lending for Your Georgia DSCR Loan?
Pride Lending has vast experience with DSCR loans in Georgia. With our help, many investors have acquired new assets with favorable loan terms and manageable loan payments. When you are looking for rentals with positive cash flow, our team understands local real estate markets and can help you find the most profitable units.
We’re committed to providing excellent customer service and ensuring you find the financing solutions you need.