Why get a DSCR loan in Florida?
It’s no secret that Florida is one of the best states in the U.S. when it comes to real estate investing.
Relatively low home prices combined with solid rents – and the fact that people are migrating here from more expensive locales – make The Sunshine State a smart place to buy rental properties.
And the Debt Service Coverage Ratio (DSCR) loan can make it even easier to purchase investment homes.
A major reason: A DSCR loan does not require you to prove personal income or traditional employment. If the property creates enough income to “cover” the debt payment, your loan could be approved.
A Florida DSCR loan could speed up your investing goals.
What’s in this article?
How is DSCR calculated?
DSCR lenders base their approval on how much income a property generates compared to the payment.
This makes sense. Why verify the buyer’s income if the property carries its own weight?
DSCR is expressed in decimal format such as 1.30 or 1.30x. If a property has a DSCR of 1.30, for instance, it produces 30% more income than is required for the monthly payment.
Following are examples of properties with a 1.30 DSCR.
|Monthly rental income||Full payment (principal, interest, taxes, insurance, HOA)||DSCR|
Here’s how you calculate DSCR:
DSCR = Income / Payment
DSCR income definition
For residential properties, determining income is simple. It’s the monthly rental income. For commercial properties (5+ unit homes, office buildings etc.), it’s different. You have to look at Net Operating Income (NOI) over the previous 12 months, which factors in property expenses like professional management, maintenance, and repairs. That’s why it’s easier to estimate your chances of qualifying for a residential property (1-4 units).
DSCR payment definition
For residential properties, add up the proposed principal and interest for the new loan, then add taxes, insurance, HOA and other dues or fees. The total is the payment side of the calculation.
DSCR example: How higher rent can improve DSCR
As you examine deals, see if there are opportunities to increase rent. Is the tenant currently paying below-market rent? With an appraiser’s rent estimate, the lender may allow you to use proposed rental income on the property.
DSCR example: How a lower payment can improve DSCR
Condos are obviously common in Florida. But they often come with high HOA dues. Remember that association dues must be included in the DSCR calculation. In some cases, it might be smart to pay a higher price for a single-family residence with no HOA dues.
|Home type||Income||Principal, interest, tax, insurance||HOA dues||DSCR|
To increase your chances of being approved for a Florida DSCR loan, find ways to lower your payment, increase the property’s income, or both.
What is the minimum DSCR to qualify in Florida?
Most lenders look for a DSCR of 1.25 or higher, meaning $125 in income for every $100 in payment. Another way to think about it is that the property should bring in 25% more income than its all-inclusive payment.
Keep in mind that many Florida DSCR lenders are flexible on this guideline.
Some may allow a DSCR down to 1.0 or even 0.75 (yes, the property actually loses money each month). How so? Often, a larger down payment, more investor experience, or verified personal income are required.
But to get the best rates and terms – and to protect yourself from losing money each month – aim for a 1.25 DSCR when you’re examining deals.
How to qualify for a DSCR loan in Florida
Florida DSCR loans are easier to qualify for than traditional financing in many regards.
They don’t require the buyer to supply tax returns and other income verification documents. It’s one of the only low-doc loans available in today’s marketplace.
However, lack of income qualification doesn’t mean anyone can qualify. Here are general requirements, which can vary by lender.
DSCR lenders require 20-25% down. This is the same as saying 75-80% loan-to-value (LTV). For a refinance, you need 20-25% current equity in the property.
Most lenders require 640 but some allow 620.
Florida DSCR lenders allow you to purchase, refinance, or take cash out with a DSCR loan, provided you meet other requirements.
Property types allowed
1-4 unit residential as well as 5+ unit commercial apartment buildings are eligible. Some lenders accept unique homes and non-warrantable condos. DSCR loans are also available on office buildings and other commercial properties.
DSCR loans are for investment properties only, so you can’t purchase a home that you intend to live in. Long- and short-term rentals are eligible.
DSCR loans are fixed-rate, adjustable-rate or interest-only.
Income and employment, debt-to-income ratio
There is no debt-to-income (DTI) requirement since no personal income verification is required. People with too many write-offs on their tax returns, or who simply don’t want the hassle of supplying two years of complex returns are eligible.
Maximum loan amount
Some Florida lenders offer DSCR loans up to $5 million, but a more common limit is $1-2 million.
Maximum properties owned
Unlike Fannie Mae and Freddie Mac loans, DSCR lenders do not impose a limit on how many financed properties the buyer can own.
Many DSCR loans come with prepay penalties, meaning you’ll be on the hook for a certain percentage of the original loan amount if you sell or refinance the loan too early. The penalty could be expensive, so make sure you’ll have the loan for the minimum required time.
Closing in the name of an LLC
This is allowed by most DSCR lenders.
Seller paid closing costs
Some lenders allow you to accept seller contributions toward closing fees, up to certain limits.
DSCR mortgage rates Florida
Florida DSCR mortgage rates are generally higher than rates for traditional mortgages.
Expect to pay 1-2% higher for DSCR loans versus standard Fannie Mae or Freddie Mac loans.
While the rate might seem high, they are a bargain considering there is no income verification.
5 best areas to invest in Florida
There are no shortage of great places to invest in Florida. The state is highly desirable for investors and regular homebuyers and renters alike.
PolicyGenius recently performed a study that analyzed top cities for real estate investors and here are their top five results.
|City||Avg. home price||5-year appreciation||Rent-to-home value||Vacancy|
But as an investor, you have to look beyond statistics and decide for yourself where to invest in Florida. You’ll probably do better in an area where you have a good feel for property prices, rents, and neighborhoods, versus somewhere with good “on-paper” stats.
5 tips for real estate investors in Florida
Florida is one of the most landlord-friendly areas in the country.
For instance, a landlord needs to give the tenant a written “pay or vacate” notice only three business days before starting the eviction process, according to Florida Landlord/Tenant Law.
While the state is easy on investors, you still need to know the laws. That’s why Tip #1 is so important.
1. Consider professional management. It’s hard to be a great investor and a great property manager at the same time. Any way you look at it, managing properties and tenants takes time away from analyzing the next deal. Sure, it costs more money, but leaving management to professionals frees up your time, and protects you legally by helping you adhere to Florida state law when advertising, finding tenants, moving on from bad tenants.
2. Focus on one area. Deciding where to invest is tough, but not deciding is tougher. If you’re considering the entire state of Florida, your chances of recognizing a good deal are small. But if you decide on one city or even one small part of a city, you can instantly estimate how much a property is worth and how much it will rent for. You’ll also build a team of property managers, realtors, and contractors in one area, and not have to find new professionals in each location.
3. Focus on one type of property. Become an expert at single-family residences. Or apartment buildings. Or condos. Or office buildings. Choose one. If you try to do every type of property at first, your learning curve will be too high and you won’t be an expert at anything.
4. Watch for water damage. For being The Sunshine State, it sure rains a lot in Florida. Heavy rains are brutal on wood-framed homes. Make sure a property has been painted and caulked regularly over its lifetime. You don’t want to find out that there’s rot inside the walls due to neglect.
5. Research the area’s economy. Make sure the local economy is solid and not based on one industry. If a whole town is employed by one company, it’s likely not a good area to invest. What if that company leaves town? Invest in areas that have diversified economies. If your tenants lose their job, can they quickly get a new one?
You typically need 20-25% down depending on lender. New investors and those with low credit may need a larger down payment.
No, you don’t need one. You can close in your own name, or in the name of an LLC with most lenders.
Yes, you can buy a single-family residence or 2-4 unit residential property with a DSCR loan. The property must be for investment purposes. You can’t use a DSCR loan to buy a primary residence.
A DSCR loan is a good way to purchase investment property when it’s difficult to prove your income. Full-time investors often don’t show enough income on tax returns. A DSCR loan allows you to qualify based on the property’s income, not your personal income.
Yes. These are often referred to as non-QM loans, meaning they don’t have to follow strict income verification rules set out by the Dodd-Frank Act. However, they are legal loans. Lenders can issue DSCR loans, though they don’t receive typical federal protection offered to lenders who only issue fully-documented loans.
Is a Florida DSCR loan right for you?
If you’re looking to invest in Florida, but can’t qualify for a traditional loan, a Florida DSCR loan could be a good fit.
In fact, it can supercharge your investing strategy and help build your portfolio of homes faster than you thought possible.