Why get a DSCR loan in New York?
The state of New York offers something for every type of real estate investor.
From big city (obviously) to extremely rural, New York is prime territory to accomplish any real estate goal.
But, as in any state, financing a rental property can be challenging. That’s why more New York investors are turning to Debt Service Coverage Ratio (DSCR) loans.
These loans use the property’s income to quality, not personal income. So investors can qualify without supplying tax returns, pay stubs and other income documentation.
Sound intriguing? Learn more about this powerful program.
What’s in this article?
How does a DSCR loan work?
A DSCR loan breaks from traditional lending in that it uses proposed or current rental income from the property as basis of the approval.
A standard Fannie Mae or Freddie Mac non-owner-occupied loan requires the buyer to show adequate income and debt-to-income (DTI) ratios. Some would argue, though that this method is flawed.
If a property brings in enough income to cover the payment and then some, why does the lender need to verify the buyer’s income or employment?
DSCR loans take this make-sense approach to loan approval. Yes, the buyer has to meet other guidelines, but he or she does not have to supply complex tax returns that may not show enough income to qualify anyway.
Debt coverage loans open doors, literally, for real estate investors.
How is DSCR calculated?
Here’s how you calculate DSCR on an investment property:
DSCR = Income / Payment
The ratio is expressed as a decimal, such as 1.0 (meaning the property’s income is the same as the payment) or 1.20 (the income is 20% more than the payment).
When calculating DSCR, it’s important to know the definitions of each side of the equation.
DSCR income definition
For a residential property like a single-family residence, 2-4 unit multifamily, or condo, income is simply the monthly rent. For commercial properties like 5+ unit apartment buildings, use the annual net operating income, or NOI. NOI is a bit more complex to calculate, so speak to a DSCR lender if you’re looking at commercial properties.
The appraiser will complete a Fannie Mae 1007 Comparable Rent Schedule. The lender will use this professional opinion of future income in the DSCR calculation.
DSCR payment definition
Add up all costs associated with owning the property, like proposed principal and interest payment, taxes, insurance, and HOA dues. The “all-in” payment is known as PITIA. Don’t include things like utilities, management, and maintenance.
Example: How higher rent can improve DSCR
Example: How lower payment can improve DSCR
Tip: DSCR is not set in stone Increase cash flow, and your chances of approval, by raising rent, lowering the payment, or both.
What is the minimum DSCR to qualify in New York?
Most lenders look for a DSCR of 1.0-1.5, but the magic number across most lenders is 1.25. That means the property brings in 25% more income than its full debt service costs (the payment).
Some lenders offer DSCR loans below 1.0, but may require income verification since the property can’t support its own mortgage payment.
How to qualify for a DSCR loan in New York
Many investors find it easier to qualify for a DSCR loan than for traditional loan types. Here are general guidelines, which can vary by lender.
Income and employment, debt-to-income ratio: No income or employment are verified. Self-employed individuals, as well as W2 employees, are eligible.
Property income verification: An appraiser will complete a professional comparable rent schedule. This will determine the proposed income for the property.
Loan-to-value (LTV): Max 75-80% LTV on a purchase, meaning you need 20-25% down. A few lenders allow 15% down. For a refinance, you need 20-25% equity in the home after the refinance to qualify.
Credit score: 640, although some lenders go lower.
Loan purpose: Purchase, refinance, or cash-out refinance. These are a great way to refinance out of a hard money loan.
Property types allowed: Single-family residence, 2-4 unit properties, 5+ unit commercial apartment buildings and other commercial structures, condos, non-warrantable condos and other unique homes may be eligible.
Property use: Non-owner-occupied investment properties only. Short- and long-term rentals allowed.
Loan type: 30-year fixed, adjustable-rate mortgages, and 40-year fixed with an interest-only period for the first 10 years.
Maximum loan amount: Most lenders allow at least $1-2 million, with some going up to $5 million or more.
Maximum properties owned: Unlike Fannie Mae and Freddie Mac, which limit the number of financed properties to 10, there are no limits to number of properties owned with DSCR loans.
Prepayment penalties: DSCR loans are considered “non-QM” which means they do not come with some of the protections that QM loans do. So, many lenders add prepayment penalties to ensure the borrower keeps the loan long enough to make the loan profitable.
Cash Reserves: Between 6-12 months of the full PITIA payment after closing. Some lenders may not have reserve requirements.
Closing in the name of an LLC: Closing in the name of an LLC or individual is allowed.
Seller paid closing costs: Allowed up to a certain percentage of the home price with most lenders.
DSCR mortgage rates New York
New York DSCR mortgage rates are about 1-2% higher than for traditional loans since these are non-owner-occupied loans where the buyer’s income is not verified.
4 best areas to invest in New York
The best place to invest is usually the area you know well. If you have a good feel for property prices and rents, most of your work is already done. That being said, here are four areas to consider investing in, according to West Forest Capital.
1. Long Island City. Just a (hopefully) short bridge drive or subway trip to Manhattan, this area boasts lower home prices (although the median is still $1.3 million). Rents are high and property values are increasing.
2. Otisville. Though home to two prisons, this area is only 90 minutes away from NYC, and the median list price is just $349,000, says Realtor.com. And, homes can be found for much less than that, especially if they need repairs.
3. Rochester. This is a bigger city of more than one million residents, so there is more selection than some of New York’s smaller towns. Average list price is under $160,000 as of August 2022, meaning you may have an easier time finding a cash-flowing property that’s eligible for a DSCR loan compared to other cities in New York.
4. Mastic Beach. This could be a short-term rental investor’s dream. With a median list price of $330,000 as of August 2022 and plenty of value-add opportunities, this beach town could offer serious cash flow for the savvy investor.
5 tips for real estate investors in New York
1. Learn about rent control and rent stabalization. More than 1 million NYC apartments are subject to rent control or stabalization. Research any property you are considering to see if and when you will be able to increase rent.
2. Look in outlying boroughs, not Manhattan. According to HomeVestors, you’ll have an easier (and not impossible) investing strategy by looking in neighborhoods around Manhattan where people are looking to live and commute.
3. Look at fixers. Everyone wants a turn-key home, but look for opportunities to get an unloved home with no competition and add value.
4. Consider professional management. New York is a tenant-friendly state, and it doesn’t take much to end up in hot water by accidentally missing some tenant’s rights. Consider a property management company whose job it is to keep up with the changing rules for landlords.
5. Focus on one area. Become an expert in an area or even a neighborhood. That way, you’ll know a great property price, what to offer, and what the unit will rent for quickly.
Yes, many lenders offer DSCR loans in New York. Call around for a lender in the state that can fund your scenario, or start your search here.
Though New York is a highly regulated state when it comes to finance, DSCR loans are available. Whether you’re looking to buy in NYC or a rural area, or something in-between, there is likely a DSCR lender available to fund your scenario.
Yes, there are 30-year fixed DSCR options available, as well as 40-year terms where the first 10 years you pay interest only.
Most lenders require 20-25% down.
Yes, DSCR lenders allow self-employed as well as W2 employee borrowers.
Is a DSCR loan right for you?
DSCR loans are opening up opportunities for New York investors with complex tax returns, not enough income showing on tax returns, or without a high-paying W2 job.
See if this loan is right for you and your goals.