What are Texas Debt Service Coverage Ratio (DSCR) Loans?
Texas DSCR loans are the perfect solution for new investors and experienced property owners. Rather than being based on the borrower’s personal income and bank statements, they are approved based on the property’s income potential. As such, a DSCR loan is ideal for residential real estate investors who want to focus on cash flow.
What Does DSCR Measure?
DSCR stands for Debt Service Coverage Ratio. It measures the property's gross operating income versus the total debt obligations and property expenses. You divide the annual gross income by the total debts and costs to get a ratio. If that ratio is more significant than one, the property generates a profit. Another way to calculate the ratio is by dividing net operating income after certain expenses by the debt obligations alone.
Net Operating Income (NOI) vs. Debt Service Obligations
Net operating income is not the same as gross operating income. Net refers to whatever income is left after all the expenses have been paid, whereas gross income measures the amount of money the property generates. The debt service obligations include expenses like principal loan payments, interest payments, property taxes, insurance, association dues, and other fees. These equations are used when lenders are considering DSCR loans.
Determining Your Property's Income-Generating Potential
There are several ways to calculate the earning potential of a property. Calculate the annual net income by subtracting all expenses from the total rental income for the year. Another way to evaluate income potential is with the gross rental yield, dividing the annual rent collected by the total property cost, which gives you a percentage. For context, the average rent price in Texas is currently $1,553 per month.
Why Choose DSCR Loans?
A DSCR loan is the ideal choice if you want to build your rental portfolio. Real estate investors have many reasons to consider DSCR loans for their wealth strategies.
Focus on Property Cash Flow, Not Personal Income
For a traditional mortgage, lenders assess the borrower’s finances. That would include looking at bank statements, pay stubs, tax returns, and other relevant documents. If you use a DSCR loan program in Texas, most lenders will ignore those personal finance elements and focus on the property's cash flow. If there is positive cash flow and you have a significant down payment, getting approved for a DSCR loan is likely.
Easier Qualification for Investors With Multiple Properties
Texas DSCR loans are vital for investors with multiple properties. The qualification process is much easier since you have the experience and income to make DSCR lenders feel there is less risk.
Potential for Higher Loan Amounts
One of the primary advantages of a Texas DSCR loan is that you can borrow higher amounts. There may be significant limits if you pursue a jumbo loan instead of a DSCR mortgage, so your purchasing power is higher with the latter. A higher loan amount lets you choose from a greater range of properties in Texas.
Flexible Underwriting Guidelines
When assessing a borrower for a conventional mortgage, the lender will look at many factors, such as the borrower’s credit score, down payment, personal finances, and debt-to-income ratio. These metrics often come with minimum requirements that immediately disqualify a borrower if the standards aren’t met. Most DSCR lenders are flexible with their underwriting guidelines since they seek a property that will generate enough income to cover all debts.
Quicker Closing Times Compared to Traditional Loans
Traditional loans can take time to approve, especially since the lender has to check the borrower’s creditworthiness, personal finances, and past tax returns. For a DSCR loan, all the lenders check are the borrower’s down payment, credit score, and rental income from the property. As a result, DSCR loans in Texas tend to close much sooner than conventional loans. Texas homes spend a median of 42 days on the market before they’re sold.
Texas DSCR Loan Requirements
DSCR loan requirements vary between public and private lenders. Each lender has different requirements for who can qualify for its DSCR loan program. Here are a few general requirements for DSCR loans in Texas.
Minimum DSCR Ratio
Although this number will vary from lender to lender, a typical minimum is 1.25. When you calculate DSCR by dividing the gross income by the total debts and expenses, the result should be 1.25 or greater to show that there is enough profit to cover all payments and then some. After all, if vacancy rates increase, the lender must have room to ensure loan payments can still be made.
Property Type
The most common properties purchased with DSCR loans in Texas are single-family homes. Some lenders may only give out a DSCR loan for this type of property, but others will grant it for multi-family homes, residential complexes, and commercial real estate. A primary residence is not eligible for a DSCR loan.
Down Payment Requirements
For the most part, you will need a 20% down payment or higher to secure a Texas DSCR loan. Your lender may accept a lower amount, but they could also require a 25% down payment or higher. It all depends on the rental income the subject property can generate to help you repay the loan.
Appraisal and Inspection Requirements
During the DSCR loan approval process, your lender will likely require a professional appraisal and inspection. This ensures that the rental property you buy is worth what you are paying for and has no significant issues. If concerns are revealed during the appraisal, that could be a risk because of potential vacancies.
Understanding DSCR Calculation
A DSCR calculation can be done on a monthly or annual basis. For example, you could take the gross monthly income and divide it by the monthly operating expenses, or you could use the annual totals for both in the equation.
Gross Operating Income and Total Debt Service
Let’s demonstrate an example. If a rental property generates $150,000 yearly after expenses are considered, this would be its net operating income. If you divide that by the total debt obligations for the year, which could be $100,000, the DSCR ratio is 1.5. This is an excellent ratio, and most DSCR lenders would feel safe with those returns on a property.
Who Benefits From DSCR Loans?
If you take advantage of DSCR loans for investment properties in the Lone Star State, you will enjoy numerous benefits. This is especially true if you belong to one of the following categories.
Real Estate Investors
Rental properties are a great way to generate wealth, but purchasing them with traditional mortgages can take time and effort. You’ll need an impressive financial background for the lender to take a chance on you, especially if you are new to the investing world. A DSCR loan is approved based on the rental income of the property you buy, so your situation is far less relevant.
Self-Employed Borrowers
Self-employment often means inconsistent income. Each paycheck may look slightly different because your business expenses and revenue are inconsistent. But those fluctuating paychecks won't factor into your loan approval if you have the required down payment and good credit. DSCR loans are based on rental income, so being self-employed will not be a barrier for the lender.
Borrowers with Multiple Properties
You can build wealth by growing your portfolio once you take advantage of real estate investment opportunities. DSCR loans make purchasing additional properties to add to your collection easy, generating even more income with every asset. If you make all your mortgage payments on time for your other loans and have the minimum down payment saved, the lender will likely approve your application.
The DSCR Loan Process
Obtaining a Texas DSCR loan is simple with Pride Lending. Our team is dedicated to serving the LGBTQ+ and minority communities with excellent lending services, including rental loans. Here is the typical process for obtaining a DSCR loan.
Find a lender – Pride Lending is ready to help you meet your investment objectives with a Texas DSCR loan. Our team has vast experience assisting investors with their financing needs.
Apply for pre-qualification – Getting pre-qualified for a DSCR loan will help you understand your purchasing limits, and with our streamlined application process, you can get pre-qualified quickly.
Search for a property – You won’t need DSCR loans until you find the right investment opportunity. Search for popular rental areas in any Texas city and know what purchase price you can afford.
Calculate your DSCR – Once you have identified some potential properties, you can calculate the DSCR for each to find one that can handle the loan repayment schedule and make a profit.
Obtain final approval – Our team will process your final loan amount and use flexible underwriting guidelines to assess and approve the DSCR loan.
Close the deal – When closing day arrives, all documents will be signed, and you will receive the funds needed to close on the sale. Then, you will officially own a new rental property and start making the monthly payments.
Why Choose Pride Lending for Your Florida DSCR Loan?
Pride Lending can be your go-to resource when navigating the Texas real estate market. We have lots of experience helping borrowers find the right loan products for their needs. For DSCR loans in Texas, we can provide favorable loan terms, a streamlined online application, competitive interest rates, and excellent customer service throughout. Our team can also help you evaluate your property’s market to find a fair price and determine a rental rate that works for you.
We are prepared to answer any questions you have about DSCR loans. Whether you want to know more about commercial loans, the potential for short-term rentals, the interest rate on a DSCR loan, or how to manage multiple rental properties, call us at 725-231-0192 to learn more.