Why get a DSCR loan in Texas?
Texas is one of the hottest markets for real estate investors today. It offers a robust economy, rising rents, and reasonable home prices in many areas around the state.
A loan type that is gaining popularity in high-cash-flow states like Texas is the Debt Service Coverage Ratio, or DSCR, loan.
A DSCR loan looks at the property’s income potential, not the buyers. Investors with hard-to-verify income or with a lot of write-offs can skip supplying tax returns or even pay stubs and W2s.
Ready to supercharge your Texas real estate portfolio? Read on.
What’s in this article?
How is DSCR calculated?
DSCR is a comparison between the property’s income and the all-inclusive payment. It is expressed in decimal format such as 1.25 or 1.25x. A property with a DSCR of 1.25 brings in 25% more income than the full payment.
In other words, rental income is $1,250 for every $1,000 in principal, interest, taxes, insurance, and HOA dues (often referred to as PITI or PITIA).
Here’s how you calculate DSCR:
DSCR = Income / Payment
Income definition for DSCR calculation
For residential properties, the income is simply the monthly rental income from the property.
Payment definition for DSCR calculation
The payment in the above calculation means principal, interest, taxes, insurance, HOA and other required property dues.
Example: How higher rent can improve DSCR
Example: How lower payment can improve DSCR
As you’re reviewing properties to buy, see if there are ways to increase rental income and/or decrease the payment. In either scenario, you improve your DSCR and have a better chance of getting approved.
What is the minimum DSCR to qualify in Texas?
Most DSCR lenders are looking for a debt coverage ratio of 1.25 or higher.
However, some allow a DSCR of 1.0 or less, or don’t have a minimum at all.
If you have a scenario you’re unsure about, click here to submit it to DSCR lenders for review.
How to qualify for a DSCR loan
The DSCR loan is often easier to qualify for than traditional loans, especially if you have income that’s hard to verify, you’re a full-time real estate investor, or you write off a lot of expenses on your tax returns.
The bulk of the qualification is put on the property, not the borrower, so it’s a more lenient loan in many respects.
Here are common qualification standards for DSCR loans in Texas
Down payment: Most lenders require 20-25% down.
Credit score: 640 and above, but some lenders go lower.
Loan purpose: Purchase, refinance, and cash-out.
Texas cash-out: Some lenders allow Texas cash-out loans. Submit your scenario here to find a lender.
Property types allowed: Depending on lender, the following are allowed: single-family residences, 2-4 unit properties, standard and non-warrantable condos, townhomes, condo hotels, and more.
Property use: Many lenders allow long-term rentals and short-term rentals.
Loan types: 30-year fixed, 5 year ARMs, interest-only ARMs, and more.
Income and employment, debt-to-income ratio: No personal income or employment is verified. No debt-to-income ratio is determined or required.
Maximum loan amount: Some lenders offer DSCR loans up to $5 million.
Maximum properties owned: Many lenders don’t have a maximum number of properties that you can own.
Prepayment penalties: Many DSCR loans come with prepay penalties. If you refinance, pay off the loan, or sell the home too early, it could mean thousands in extra costs at closing. Check the loan documents and ask your lender about any penalties.
Closing in the name of an LLC: This is allowed for most DSCR loans.
Seller-paid closing costs: Many DSCR lenders allow the seller to contribute toward your closing costs, up to certain limits.
DSCR mortgage rates Texas
DSCR mortgage rates are competitive considering they are an alternative lending solution. Some lenders will offer rates about 1% higher than for traditional loans. The higher the DSCR ratio, the better your rate might be.
5 best areas to invest in Texas
There are opportunities in any area of Texas, but here are areas that show signs of good returns in rental and property value growth over time.
Policygenius recently performed a study looking at top places to invest in Texas, weighing cities with metrics in rent-to-income ratio, rent-to-home value ratio, and more. Here are their top 5 places to invest.
|City||Avg. home price||5-year appreciation||Rent-to-home value||Vacancy|
5 tips for real estate investors in Texas
1. Texas cash-out rules do not apply to investment properties. That means you can get a cash-out refinance (even a DSCR cash-out) more than once per year on a Texas property.
2. Do research on the local economy. Invest in an area with diversified job opportunities. That way, if one industry – oil for instance – experiences a downturn, there are plenty of other work opportunities for your tenants.
3. Consider multi-unit properties. Texas is already a great cash-flow state, offering low prices compared to rents. But you can increase cash flow even more by seeking out 2-4 unit properties. These give you more rental income, allowing you to more easily qualify for a DSCR loan.
4. Consider professional management. According to Roofstock, Texas is one of the most landlord-friendly states. Still, it’s a good idea to consider professional management to make sure you’re abiding by state laws. Plus, it frees you up to focus on investing.
5. Invest in what you know. If you’re already a Texas resident, it’s a good idea to start in the neighborhoods you’re familiar with. You have a good feel for values and rents. That being said, Texas is one of the most popular states in the U.S. for out-of-state investors, so don’t be afraid to check into some Texas markets if you’re from elsewhere.
The lender verifies the “debt service coverage ratio” or DSCR of the property to approve the loan. If the property’s income outweighs the monthly payment, the loan may be approved without verifying the borrower’s income.
Yes, DSCR loans are classified as “non-qualified mortgages”, meaning they don’t have to adhere to traditional lending standards such as verifying the borrower’s personal income. Non-QM lenders have more flexibility to approve loans compared to QM lenders.
Yes, many banks and mortgage companies offer DSCR loans for Texas real estate investors.
DSCR loans typically come with 30-year terms. Loan types include fixed rate, adjustable rate, and interest-only.
Is a Texas DSCR loan right for you?
The DSCR program can supercharge your Texas real estate portfolio because it removes many traditional barriers to financing a home purchase.
Check if a DSCR loan can help you work toward your investing goals.