Finally, a no-tax-return loan for real estate investors
Michigan is drawing in real estate investors for its growing economy, in-demand jobs, and top-rated tourist attractions — and most of all, its home prices.
The state is the 12th least expensive state in the country as far as average home price. This makes picking up a cash-flowing investment property easier than in most places.
And a top tool supporting Michigan real estate investors is the Debt Service Coverage Ratio, or DSCR, loan.
DSCR loan approvals are based on a property’s income potential rather than the buyer’s income. This provides the flexibility investors need to move ahead with their goals.
Let’s take a look at how to boost your Michigan real estate portfolio with the help of a DSCR loan.
What’s in this article?
As an investor, you know how difficult it can be to prove your true income based on tax returns, pay stubs, or other typical forms of income documentation.
General methods of proving income documentation don’t provide an accurate representation of your earnings and what you can afford.
Instead, a DSCR loan focuses on the property’s cash flow. If the property makes enough to cover its own mortgage payment, the loan could be approved.
DSCR loans for residential properties compare the property’s monthly rental income with its payment. A property with $1,250 in rental income and a $1,000 payment has a DSCR of 1.25 or 1.25x.
The higher the ratio, the better. For example, a DSCR of 1.25x means the property brings in 25% more income than the full payment.
Many lenders require a DSCR of at least 1.25. Anything below 1.0 has negative cash flow
Here’s how you calculate DSCR:
DSCR = Income / Payment
For example, calculating DSCR would look like this for a property with monthly rental income of $1,500 and a full payment of $1,100.
- DSCR = $1,500 / $1,100
- DSCR = 1.36
How to determine DSCR income
The “income” portion of the DSCR calculation is your residential property’s monthly rental income. For commercial properties, use Net Operating Income, or NOI. NOI is the yearly income less expenses like management, repairs, and taxes.
How to determine DSCR payment
The “payment” in this calculation is equal to the principal, interest, taxes, insurance, HOA, and other required dues or fees. This “all in” payment is also known as PITIA.
By manipulating the payment and/or income, you can improve your DSCR, and your chances of loan approval.
Example: How higher rent can improve DSCR
Example: How lower payment can improve DSCR
When you’re considering which properties to purchase, play with the rental income and payment amounts to determine how you can improve your DSCR.
Can you increase the rent by splitting the home into two units? How about bringing the tenant up to market rent? Can you put more money down to get a lower loan balance and rate, and lowering the payment?
As you can see in the tables, both scenarios give your DSCR a boost and make it easier to get approved for the loan.
A DSCR of 1.25 or higher is ideal for most lenders.
However, you’ll find in your search that some lenders accept a DSCR as low as 0.75, or don’t have a minimum.
As you’re determining which properties may be ideal for your situation, it can be helpful to consult with DSCR lenders for review.
DSCR lenders are more focused on the property’s potential for profit than the investor’s income. So the loans, in many ways, are much more flexible and easier to qualify for than traditional loans.
If you have significant write-offs on your tax returns, or you just don’t show much income because you’re a full-time real state investor, a DSCR loan is designed for your unique situation.
Let’s take a look at the common requirements for DSCR loans in Michigan.
Loan-to-value (LTV): The maximum loan-to-value (LTV) ratio for DSCR loans is usually 80%, meaning borrowers must put down at least 20%. Some lenders require 25% down or higher for lower DSCRs.
Credit score: Many lenders require a credit score of at least 640, but some may go lower.
Loan purpose: DSCR loans can be used to purchase or refinance a property, or for a cash-out refinance.
Property types allowed: DSCR property types include single-family residences, 2-4 unit properties, condos, townhomes, and more, depending on the lender. Commercial properties such as 5+ unit apartment complexes and office buildings are allowed, too. If you’re unsure if the property type you’re researching qualifies for a particular DSCR loan, reach out to a lender here.
Property use: Property uses include investment/rental only, short-term rental, and long-term rental. No primary residences allowed.
Loan type: Loan types include 30-year fixed-rate, 5-year ARMs, interest-only ARMs, and more.
Income and employment, debt-to-income (DTI) ratio: DSCR lenders don’t require income or employment verification, or DTI ratios.
Maximum loan amount: Max loan amounts vary by lender, but some offer up to $5 million.
Maximum properties owned: Many lenders don’t have a requirement for the max properties owned for DSCR loans.
Prepayment penalties: Many DSCR loans have prepayment penalties for refinancing, paying off the loan, or selling the home too early. Be sure to check with your lender about their prepay penalties.
Reserves: Most lenders require reserves of 6-12 month’s worth of the full PITIA payment, depending on DSCR.
Closing in the name of an LLC: Allowed for most DSCR loans.
Seller-paid closing costs: Many lenders allow the seller to contribute to your closing costs—with certain limits.
You usually can qualify for a better mortgage rate if you have a higher DSCR, but generally, these rates are fairly competitive compared to traditional loans.
Some lenders offer DSCR rates that are only about 1% higher than conventional loans.
Michigan has numerous investment opportunities around the state, but the following areas have popped up time and again on 2022 lists of best places to invest or purchase a home in Michigan.
Based on data from the U.S. News & World Report, Mashvisor, and Policygenius, here are the five best areas to invest in Michigan.
Detroit is home to Quicken Loans and DTE Energy, and a new Apple Developer Academy.
- Median home price: $273,032
- Median monthly rent: $962
Ann Arbor is the home of the University of Michigan and boasts a high quality of life and low crime rates.
- Median home price: $270,567
- Median monthly rent: $1,161
Grand Rapids is known for its rich art scene, craft brewery scene, and the healthy job market.
- Median home price: $366,979
- Median monthly rent: $910
Flint is known to be a proud, resilient community, and home to numerous museums, art festivals, and higher education opportunities.
- Median home price: $142,700
- Median monthly rent: $781
Michigan’s capital city is centrally located and accessible to the state’s biggest cities. Business Insider named Lansing a top 20 city to move to post COVID-19.
- Median home price: $157,267
- Median monthly rent: $884
If you’re interested in investing in Michigan, here are five tips to help you as you research properties and put together your local real estate team.
Every state has different laws. Michigan has numerous laws in place to protect tenants, so you’ll need to make sure you understand your responsibilities—or hire a management company if you’d rather not dig into the local laws yourself.
Thanks to the Pure Michigan campaign, out-of-towners are learning more about the beauty of the Great Lakes, and Michigan’s unique adventure opportunities.
But if you want to take advantage of the tourism in this state, you have to have realistic expectations for the bitterly cold winters that keep people away from the beach.
Instead, find areas you can capitalize on both summer beach vacations as well as winter skiing and snowboarding.
Even if you’re from Michigan, you may not understand the varying needs across the state. Dig in by connecting with professionals who understand the area you’re seeking. Is there a demand for more single-family rental properties, or are condos and townhomes more popular? Can you make more money and have more success with multi-family properties?
Focus on areas with multiple job opportunities across many industries, similar to the top five areas we listed above. These cities are experiencing growth and success because they aren’t relying on one industry to support them.
Some investors have avoided Michigan because of reports that the state’s property taxes are higher than national averages. However, this is offset by other tax breaks, including city and county taxes, personal income taxes, and a flat 6% sales tax.
It’s generally easier to get a DSCR loan than other loan types because DSCR loans are more focused on the property’s potential for profit rather than the investor’s income.
Yes, many banks and mortgage companies offer DSCR loans for Michigan real estate investors.
Rather than providing tax returns, pay stubs, or other personal documentation to qualify for a DSCR loan, your lender will calculate your DSCR. This is your residential property’s monthly rental income divided by your full monthly payment including principal, interest, taxes, insurance, and HOA fees if any.
DSCR loans typically have 30-year terms, but there are 40-year options. Loan types include fixed rate, adjustable rate, and interest-only.
DSCR loans open up numerous growth opportunities for real estate investors by providing the flexibility they need to achieve their goals.
By allowing investors to qualify with the most essential information—the DSCR—rather than income or other traditional factors, the DSCR program can help Michigan investors quickly expand their portfolios.
Submit your DSCR scenario to discover if a DSCR loan can help you leap into the Michigan real estate world.