DSCR Loans in North Carolina Expert Insights

Are you hoping to strengthen your investment strategy in North Carolina’s hot housing market? A DSCR loan could be the answer you’re looking for.

For many investors, especially those who are self-employed and file deduction-heavy returns, meeting the documentation requirements of traditional loans can be challenging—if not impossible. 

A DSCR loan is an excellent way to purchase investment properties without showing proof of income or employment. 

Ready to add to your North Carolina portfolio? Keep reading.

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Why get a DSCR loan in North Carolina?

The NC economy is strong and there’s still upside in rents and home appreciation. There’s great potential for cash flow and returns in the southern state. 

With a debt service coverage ratio (DSCR) loan, investors can qualify based on the property’s revenue—not individual income. 

This is a great strategy for investors looking to invest in the area and get approved for funding. 

How is DSCR calculated?

Lenders use DSCR to evaluate whether an investment property can generate adequate cash flow to cover the estimated mortgage payments. 

DSCR is expressed as a decimal, such as 1.25 or 1.25x. To calculate DSCR on residential properties, divide the property’s monthly rental income by the estimated mortgage payment. For commercial properties, lenders look at net operating income (NOI) versus payments. NOI factors in costs of running the property like management and repairs.

• A DSCR ratio of 1.0 shows the investment breaks even at the time of calculation. 
• A DSCR ratio of 1.25 shows that the investment generates 25% more income than the payment requires. 

Most lenders look for a DSCR of at least 1.25, although some allow lower ratios.

DSCR =  Income / Payment

Let’s look at an example:

• If a residential property has monthly income of $2,500 and a monthly payment of $2,000 including principal, interest, taxes, insurance, and HOA dues, the DSCR is 1.25 ($2,500 ÷ $2,000 = 1.25)
• If a commercial property has an annual net operating income of $50,000 and annual payments total $40,000, the DSCR is 1.25 ($50,000 ÷ $40,000 = 1.25)
• In these examples, both properties have a positive cash flow and generate 25% more income than necessary to repay the loan. 

Income

How do you determine income for a residential property in the above calculation?

When it comes to DSCR loans for residential rental properties, the income is the rental income from tenants. For commercial properties, use NOI.

Payment

How do you determine the full payment for the above calculation? In the above calculation, payment refers to something called “PITIA.” 

PITIA is an acronym that stands for principal, interest, taxes, insurance, and associated fees (such as HOA fees or other mandatory property dues.)

Example: How higher rent can improve DSCR

Example: How lower payment can improve DSCR

Pro Tip: When evaluating properties for inclusion in your portfolio, look for ways to increase rental income and/ or decrease your payments. You’ll not only improve your DSCR but also the likelihood of your investment scenario being approved. 

What is the minimum DSCR to qualify in North Carolina?

DSCR requirements will vary depending on which lender you choose. 

While most lenders in North Carolina generally look for a DSCR of 1.25 or higher, some allow a DSCR of 1.0 or even 0.75. Additionally, some DSCR lenders have no minimum DSCR requirement. 

To get the best loan rates and terms and to reduce the chances of losing money each month, look for a DSCR of 1.25 or higher. 

Does your investment scenario meet the requirements for North Carolina? Submit it to DSCR lenders for review.

How to qualify for a DSCR loan in North Carolina

Once you’ve figured out your coverage ratio, you can apply for the loan (or even if you need help determining your DSCR). The application process generally takes less time than applying for a standard investment mortgage. 

This is due to the fact that eligibility for a DSCR mortgage is dependent mainly on the income generated by the property rather than the investor’s income.

Is it hard to qualify for a DSCR loan?

Since the main focus of DSCR loans is the property, not the individual’s income, borrowers often find qualifying for DSCR loans easier than conventional mortgages or loans. 

DSCR loan applications are also more streamlined and require less documentation, such as income verification from the borrower. 

In many ways, DSCR loans are more borrower-friendly than traditional loans.

Common DSCR qualifications in North Carolina include the following. 

Loan-to-value (LTV): DSCR loans usually have a maximum LTV ratio of 80% (20% down payment).

Credit score: 640 is typically the minimum credit score needed for a DSCR loan, although some lenders will accept scores as low as 620.

Loan purpose: Purchase property, refinance (to get out of a hard money loan, for example), and cash-out refinance.

Property types allowed: Single-family residences, multi-family residences (2-4 units), condos, townhomes, and condotels, among others. Commercial properties are also permitted.

Property use: Limited to investment properties, so investors can’t use them to purchase their primary residence. Both short- and long-term rentals are allowed.

Loan type: Includes 30-year fixed, 15-year fixed, 5-year ARMs, and Interest-only (IO) ARMs, among others. Some lenders even offer 40-year terms.

Income and employment, debt-to-income ratio: Because DSCR loans look at a property’s income, not an individual borrower’s income, personal income verification, employment verification, and debt-to-income (DTI) ratio are not required.

Maximum loan amount: Varies by lender, but some offer DSCR loans up to $5 million.

Maximum properties owned: Unlike Freddie Mac and Fannie Mae loans, most DSCR lenders don’t set a property ownership limit. 

Prepayment penalties: Included in many DSCR loan terms. Investors who refinance their loan, pay it off, or sell the property early could face additional closing costs in the thousands. Review loan documents carefully and check with your lender about any prepayment penalties.

Closing in the name of an LLC: Most DSCR loans allows LLCs. 

Seller paid closing costs: Generally permitted contributions up to preset limits, usually based on a percentage of the sale price. 

DSCR mortgage rates in North Carolina: Can be higher than traditional Fannie Mae or Freddie Mac mortgage loans. Many investors consider the slightly increased mortgage rate a small price for no income verification requirement.

5 best areas to invest in North Carolina

North Carolina saw the nation’s third-largest population boom last year, with an increase of almost 65,000 new residents. 

With many newcomers to the Tar Heel State settling in metropolitan centers, rental properties in these top North Carolina cities could be a great addition to your investment portfolio.

• Greensboro
• Charlotte
• Raleigh
• Durham
• Ashville

5 tips for real estate investors in North Carolina

A hot market will mean investors may have increased challenges. But with the right efforts, you can succeed. 

Search Local: Find a local real estate agent, someone who really knows North Carolina—especially the Triangle, which continues to experience tremendous growth thanks to its broad demographic appeal that ranges from first-year college students to late-stage retirees. 

Weigh the pros and cons of using a property management company: Sometimes the best choice is to delegate. While property management costs money, it can free up valuable time and eliminate the stress of finding tenants, managing properties, making repairs, etc. 

Focus on a specific property type: Specializing in a specific property type allows you to master its specifics and edge out the competition. Become an expert on condos in North Carolina, or multi-family-residences, for example. By continually investing in the same type of properties, you’ll reduce your learning curve and need less time to ramp up with each new investment. 

Consider multi-unit properties: Investing in multi-family properties can help you increase the overall rental, which can help you increase your DSCR. Multi-family properties also offer convenience when it comes to certain upgrades like repairing a roof (you’ll only need to repair one roof for the entire building).

Look for weather damage: Despite its name, North Carolina is southern enough to experience extreme weather. And depending on where you are in the state, that can include severe storms, tornadoes, floods, and snow and ice storms. 

DSCR loan FAQ

Is a North Carolina DSCR loan right for you?

DSCR Loans in North Carolina program could be the right financing option if you want to grow your North Carolina investment portfolio but don’t meet the qualifications for a traditional loan.

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