What are Debt Service Coverage Ratio (DSCR) Loans?
DSCR loans are specialized mortgage products private lenders provide to finance investment properties. Unlike a conventional loan, qualification is based on the investment’s financial health rather than the borrower’s income, making these loans suitable for investors working to develop a healthy cash flow.
What Does DSCR Measure?
A DSCR loan program is focused on the Debt Service Coverage Ratio, which analyzes whether the property generates enough income to satisfy its debt obligations. This is assessed by dividing the property’s net operating income by its annual debt service to create a simple yet powerful financial metric.
Net Operating Income (NOI) vs. Debt Service Obligations
Net operating income is the rental property’s income minus its operating expenses, such as management fees, repairs, taxes, and maintenance. On the other hand, debt service is the expenses associated with the mortgage, such as the principal, interest payments, property taxes, insurance, and association dues.
Determining Your Property's Income-Generating Potential
To determine your property’s ability to pay its debts, you divide the NOI by the debt service, creating a ratio. For property investments, a good DSCR is anything above 1.25, which is what most lenders will expect before approving a loan.
DSCR Loans
Tennessee
Purchase the Tennessee rental property of your dreams with DSCR loans!
Tennessee’s rental market is steadily rising, making the Volunteer State an attractive option for the discriminating real estate investor – and it’s never been easier for property investors to access financing for their dreams. Debt Service Coverage Ratio (DSCR) loans are a powerful real estate investment tool that allows you to purchase rental properties based on their expected rental income rather than your personal borrowing profile.
Why Choose Tennessee DSCR Loans?
Whether you’d like to purchase a vacation rental near the Country Music Hall in Nashville or seek a quiet rental property to soak up the natural beauty of the Great Smoky Mountains, a DSCR loan can help.
These versatile mortgage products offer several benefits, including competitive interest rates and fast closing times, that make them a superior choice over conventional loans.
Focus on Rental Property Cash Flow, Not Personal Income
Because a DSCR loan focuses on the rental’s ability to cover its loan payments, they don’t require income verification. Lenders who offer DSCR loans typically only need you to provide proof of assets and a minimum credit score. This makes these mortgages an excellent choice for borrowers with good credit who don’t have the documentation necessary for a traditional mortgage.
Easier Qualification for Investors With Multiple Properties
For those with high investment goals, such as owning multiple properties in the Music City, DSCR is the best investment loan. You can roll several subject properties into the same DSCR loan, helping you expand your portfolio much faster than possible with conventional mortgages.
Potential for Higher Loan Amounts
Conventional loans are bound by the conforming loan limit, which ranges from $766,550 to $890,100 in Tennessee. This maximum loan amount may not be enough to afford a high-price property, but thankfully, a DSCR loan can be much higher. Many lenders have a minimum property price rather than a firm maximum limit.
Flexible Underwriting Guidelines
Because DSCR lenders are not bound by the same restrictions as other lenders, there’s more room for negotiation in specific circumstances. These flexible underwriting guidelines mean you can seek more favorable terms, such as longer or shorter repayment terms and lower interest rates.
Quicker Closing Times Compared to Traditional Loans
Reaching your financial goals can be challenging when dealing with the lengthy timeline of typical loans. With DSCR loans, you can close on investments much faster because less documentation is required. This helps you buy the most desirable property before someone else does and gives you an edge over other investors.
Tennessee DSCR Loan Requirements
While different lenders have their requirements, you can expect to meet some basic qualifications to obtain a DSCR loan, such as the investment property having a minimum DSCR, providing a specific down payment, and getting multiple appraisals.
Minimum DSCR Ratio
The minimum DSCR for an investment property is usually 1.25, which means your subject property is making 1.25 times its debt service after all operating expenses have been considered.
Property Type
Only investment properties are eligible for Tennessee DSCR loans. Typically, this includes long-term rental properties and vacation rentals. However, a property owner may be able to find a lender who can finance commercial real estate like office buildings and restaurants.
Down Payment Requirements
You should expect to put at least 20% down on a DSCR loan. As a benefit, you can build equity faster toward other investments when you’re ready to refinance.
Appraisal and Inspection Requirements
For DSCR loans, the lender will order more than one appraisal to assess whether the investment is worth the purchase price. You will also need to have the property inspected to ensure it is free from major structural issues.
Understanding DSCR Calculation
The Debt Service Coverage Ratio is a crucial element of accessing DSCR loans. This is the net operating income (NOI) divided by the debt service, which provides a ratio demonstrating financial solvency.
Net Operating Income and Total Debt Service
NOI is the property’s income minus its business expenses, such as taxes, repairs, maintenance, and security. Debt service includes the costs related to the home loan, including the principal, interest, property taxes, insurance, and HOA fees. You then divide this to get the DSCR, which shows the property’s income potential.
For example, a property with an NOI of $150,000 and a debt service of $125,000 would have a DSCR of 1.2. To increase this to 1.25, the rental would need to make an additional $6,250 per year.
Who Benefits From DSCR Loans in Tennessee?
DSCR loans benefit real estate investors, self-employed borrowers, and those with a full-time rental business seeking to earn income from real estate.
Real Estate Investors
As these loans are specially formulated for investing, they don’t require documentation about your finances. This is incredibly helpful for those whose primary income comes from their investments.
Fast closing times and larger loan amounts allow real estate investors to act quickly, which is crucial in highly competitive areas of Tennessee. DSCR loans can also be taken out under a business name, helping protect your personal assets.
Self-Employed Borrowers
Because DSCR loans don’t require tax returns, bank statements, or pay stubs to qualify, they are an excellent choice for those who might find it challenging to obtain a conventional mortgage because of the strict underwriting requirements.
Borrowers with Multiple Properties
The conventional mortgage product only allows one home per loan, which can be frustrating if you’re trying to build up a significant portfolio of properties. DSCR loans allow you to bundle more than one investment property into the same loan, streamlining payments and making it easier to expand your portfolio quickly.
The DSCR Loan Process
Our team will help you through the entire DSCR loan process, including these crucial steps.
Find the Right Lender – Look for a company with years of experience in DSCR loan products and a proven track record of success.
Pre-Qualification – You only need a few personal details, including your credit score and evidence of your cash reserves.
Finding Property - For the best chances of success, work with a real estate professional familiar with the Tennessee market and commercial investments.
Application - The DSCR loan application focuses on the investment, including its DSCR and potential rental income. The mortgage company will then order appraisals and inspections to ensure your purchase meets its qualifications.
Underwriting – During underwriting, a mortgage professional reviews all the loan details and ensures everything is correct.
Approval and Closing – Once approved for a DSCR loan, you will provide the down payment and sign the necessary paperwork. The lender will then disperse the funds, and you’ll be the proud owner of your rental.
Why Choose Pride Lending for Your Tennessee DSCR Loan?
Pride Lending is committed to helping LGBTQ and other underserved investors get the funds they need to purchase investment properties in the Volunteer State. With our years of experience assisting with DSCR loans in Tennessee, we can help you find great lenders who match your needs and offer competitive interest rates.
Throughout the process, we strive to provide top-notch customer service, answering your questions and guiding you toward the right loan product for your goals. As an LGBT Business Enterprise certified by the National Gay and Lesbian Chamber of Commerce, our commitment to the community runs deep.