(Mar 31, 2023)
What's a DSCR loan?
Many would-be investors think they can't start investing in rental properties until they've paid off their primary residence or taken care of their student loans. But by putting off investing, they're missing out on opportunities as real estate prices continue to rise.
DSCR loans are an excellent option for real estate investors. They are non-QM loans considering your future earnings potential rather than your past earnings. DSCR loans base their underwriting decisions on the proposed rental property's potential profits in the future.
This is beneficial as it enables investors to avoid disclosing their income while seeking a mortgage for an investment property.
A DSCR gives lenders deeper insight into a customer's ability to repay the borrowed amount without assessing their income.
Why get a DSCR loan in in Broward County, Florida?
Broward County, Florida offers several advantages that attract folks here and thus create demand for rental properties. Averaging 75°F throughout the year, Broward is warm and inviting. During the winter, temperatures stay above 66°F, but the rest of the year experiences 250 days of bright sunshine.
This draws foreign buyers looking to flee colder areas and find comfort in warm climates. The county is also well-developed, providing excellent transportation options and access to museums, sporting events, shopping centers, nightclubs, and natural parks like the well-known Everglades National Park.
According to stats released last May, the unemployment rate dropped 2.6% lower than it was a year ago. The county's median age is 40.5, indicating a significant presence of working-class folks to sustain its real estate market. Also, like the rest of Floridians, residents here enjoy zero income tax.
These advantages, along with many others, are a continuous appeal for out-of-state folks who move here daily, raising the demand for rental homes. Investing in rental properties can be a great way to build for the future, but it's essential to act fast and not wait too long.
If you're considering investing in rental properties, don't wait—the sooner you start, the better. DSCR loans in Broward County assess the expected cash flow from a rental property vis-à-vis monthly payments, leaving out the borrower's income. This leads to a fast, easy, and flexible loan qualification process, especially for people with complex tax returns or no pay stubs.
How does a DSCR loan work?
Some real estate investors might not be eligible for a standard loan due to business deductions or write-offs they make on their properties. But with DSCR lending. Proof of income is not required.
You can qualify for a loan without providing tax returns, w2s, pay stubs, or other supporting documentation. Your real estate property will generate enough income to help you make the loan payments.
How is DSCR calculated?
A DSCR loan assesses the property's revenues with the total payments (principal, interest, taxes, insurance, homeowners' association, and other costs, i.e., PITA). It's calculated as income or payment and expressed in decimal forms, such as 1.0 or 1.0X.
Many lenders prefer higher DSCR ratios to guarantee the investor won't miss payments. For example, a rental property with a $3,000 income and total payments of $2,500 has a 1.3 DCSR. Of course, a 1.0 or 1.0X DSCR means the income and payments are matched, while a DCSR > 1 means rental income is bigger than total payments.
Of course, you can increase the DSCR ratio by hiking the rent on the property or simply reducing PITIA debt obligations by putting down a more significant down payment, etc.
How to determine DSCR income
DSCR considers the monthly rental earnings for residential units or the net operating income (NOI) for commercial units. Of course, NOI is gross income minus operating expenses.
How to Calculate DSCR Payment
A DSCR loan assesses a residential property's principal, interest, taxes, insurance, homeowners' association, and other costs (i.e., PITA). Naturally, you won't be able to figure out the precise amount unless you engage the services of a DSCR lender to help estimate your interest rate and other expenses.
You can raise your DSCR ratio by lowering your PITIA obligations, raising your rent, or both. But know that you can't raise the rent significantly above nearby properties. Find ways to increase income or decrease payments for the property to hit the ideal DSCR.
DSCR mortgage rates in Broward County, Florida
DSCR mortgages are an alternative property financing option; their rates are usually higher than conventional loans. However, they're not that high to make these types of loans problematic.
Indeed, in Broward, interest rates on these loans are often only about 1% above regular loan rates, and depending on the borrower's DSCR ratio, they may be cheaper.
Pros of DSCR loans
DSCR loans offer many benefits over traditional loans for real estate investors. Here's a look at some of the advantages of choosing DSCR loans:
Proof of personal income isn't required.
Underwriters won't need to confirm your income because they will use the proposed property's expected rental income to make their assessments. This benefits real estate buyers with no pay stubs or whose pay stubs don't truly reflect their income due to business deductions and write-offs.
Full-time and inexperienced real estate investors sometimes do not report significant revenue on their tax returns. Indeed, one reason why folks choose real estate investments is to avoid employment income taxes. But this makes obtaining a conventional mortgage more difficult. Lenders like Freddie Mac and Fannie Mae expect complete proof of income. DSCR loans allow you to skip this condition.
No employment verification
Banks won't need to get in touch with your employer because your income isn't taken into account by the DSCR. For self-employed buyers, this may expedite the loan application and qualification process.
It will not affect personal finances
If you use a conventional loan to buy a rental property, the new payments and purchases must be within your household's monthly budget. That kind of investment property financing may restrict your future borrowing capacity for private purposes.
On the other hand, DSCR borrowing ensures your finances and investment property are separate. For example, you might be allowed to close the loan under an LLC name, and it won't appear on your credit file. That way, your borrowing capacity remains unaffected by the DSCR loan.
Multiple property purchases are allowed
Financing depends on the property's income stream, not your financial circumstances. That means you could take out loans for several properties at once, quickly expanding your property portfolio.
Reduced closure periods
Banks can move faster since they don't have to spend time examining your employment history and personal income. DSCR loans have a quicker closing time than conventional mortgages.
These loans are usually made available by private lenders who can cut through red tape and thus make speedy determinations.
Flexible underwriting
Actual people, not machines, examine borrowers' DSCRs. This means that some borrowers might qualify even with less perfect profiles that don't perfectly fit into set guidelines.
What is the required DSCR to be eligible?
Although each Broward County lender has a different minimum DSCR requirement, most accept ratios above 1.25.
However, some banks are flexible and accept DSCRs as low as 1.0, depending on the borrower's satisfaction.
Get in touch with a reputable DSCR loan provider to discuss your situation and get their opinion on your investment property, potential income, and payment obligations.
Please remember that you must also fulfill the conditions listed below to qualify for a DSCR loan.
Broward County, Florida DSCR loan guidelines
Investors can typically qualify for DSCR loans far more efficiently than conventional loans. You have a decent chance of qualifying as long as the property you plan to buy meets or surpasses the DSCR set by the lender.
Let's look at some more criteria that lenders will consider.
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LTV (loan-to-value) ratio - In general, DSCR loans have maximum LTVs of 75–80%, so you should set aside at least 20–25% for the down payment.
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Credit rating - The optimum credit score is 640 or above, but specific lenders may require a higher score while others may accept a lower score.
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Estimating the property's potential rental earnings - Your projected income will have to be verified by the lender. If you want to acquire a single-family rental property, an appraiser will come in to make assessments and the Single-Family Comparable Rent Schedule Form 1007.
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Loan objective - You can use a DSCR loan to buy a home, refinance one, or get cash.
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Permitted property types - Although the permitted property types may differ from DSCR lender to DSCR lender, they often include single-family homes, 2–4-unit houses, townhomes, and condos. Building complexes with five or more units and other commercial properties are also allowed. To learn more about the precise kinds permitted in your location, speak with a local DSCR lender.
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Property usage - Both long- and short-term rentals, as well as rental and investment properties, are allowed. Permanent residents aren't allowed.
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Type of loan - Depending on your bank, loan options may include 30-year flat rates, 5-year interest-only ARMs, and more.
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Employment, income, and DTI - Lenders don't demand proof of income, employment, or optimum DTI. Instead, they look at the revenue expected from your rental property.
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Loan amount cap - The loan amount cap varies by bank, but you may generally be allowed to borrow up to $5M.
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Maximum number of properties - Most DSCR lenders usually don't limit the number of investment properties.
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Early payment penalties - Of course, penalties apply if you sell the house too soon, pay off the debt too soon, or refinance too soon. Specific policies for these fines will be set forth by your lender.
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Cash reserves - Many lenders require borrowers to have 6–12 months' worth of cash to cover the loan amount fully. Your DSCR lender will determine the cash reserve amount for you.
- Seller-covered closing costs - Depending on your lender's DSCR policies, your seller may cover your closing costs, subject to a cap.
The five best cities to invest in are Broward County, Florida
Over 1.94 million people reside in Broward County. From prestigious cities like Fort Lauderdale and Coral Springs to quiet communities like Plantation and Miramar, Broward County offers a wide range of real estate investment opportunities.
The demand for rentals is likely to rise due to a nearly 29% increase in median property prices in Broward County since last year. Just 63% of locals own their homes; the remaining inhabitants depend on rentals.
The most sought-after properties in the county are single-family rentals, but there are many other opportunities as well.
Based on present growth and potential for future growth, these are some of the best cities in the county for rental property investments.
Fort Lauderdale
The county capital of Broward County in Florida, Fort Lauderdale, lies 40 KM north of Miami City and has a thriving economy. It receives roughly 3,000 hours of sunshine annually and is close to the Atlantic Ocean, making it a popular convention and tourist destination.
Port Everglades in the city is the world's 3rd largest cruise port. It is regarded as the world's yachting capital as well. In addition, the city features a 600,000 sq ft convention facility southeast of downtown that draws roughly 3.5 million visitors each year. The fact is that there is a lot of room for real estate growth in this city.
The city's Las Olas Boulevard draws a lot of artists and creative types, making it a fantastic place to put up studio spaces, lofts, rowhouses, etc. The neighborhood offers a variety of galleries, historic attractions bars and also links the city center to the ocean.
Another excellent neighborhood to invest in is Coral Ridge, which lies north of Sea Ranch Lakes and Fort Lauderdale Beach. This small, upscale neighborhood with waterfront mansions is popular with local real estate brokers and famous international artists.
Excellent alternatives are Poinsettia Heights and Imperial Point.
Margarite
Margarite has long served as Florida's cultural and commercial hub. The city lies in the Miami-Fort Lauderdale-West Palm Beach Statistical Area. People relocate here because of the ethnic diversity, coastline, aquatic activities, and unending entertainment.
The city has a 5.5 % unemployment rate, lower than the national average, and recent job growth has been growing by 1.9%. Renting is a better option here, given the median home price is $238,834, a 15% increase from last year and signals a seller's market.
Sunrise
Due to its excellent rental trends, Sunrise makes a great destination for a South Florida property investor. The market is generally stable and showing promising developments. Both Airbnb and conventional rental options are seeing good returns citywide.
The average home selling price is $249,000(up 32% from the previous year). There are no countywide restrictions for non-owner-occupied rentals for a short period, although several cities in the county, including Fort Lauderdale, have taken specific actions. Therefore, before investing in short-term rentals, we advise seeking competent legal counsel regarding local rules.
Coral Springs
Coral Springs, about 33km northwest of Fort Lauderdale, is situated next to the vast Florida Everglades, a protected wetland covering more than 1.5M acres and offering stunning views. It provides a beautiful urban/suburban mixed atmosphere with top-rated schools, secure neighborhoods, and a thriving business environment.
Although the city's median home price ($336,900) is greater than that of most cities in the county, buyers may be able to find homes for sale below this mark by doing thorough research. Investors' average monthly rental income is $2000, making it a good place for rental property investments.
Davie
With a median home price of $382,468 and an average traditional rental income of $1,904, the Davie real estate market is moderately competitive but not particularly tilted in one direction or the other (rental vs. purchase).
Many young professionals who want the tranquility of a smaller town but want proximity to a big city for a weekend or holiday getaway move here because it's close to both Miami and Fort Lauderdale. The town is also popular with college students due to the presence of the South Florida Educational Center and various big university campuses.
Is a DSCR loan a wise choice?
The speed and ease of DSCR loans appeal to investors who wish to expand their rental property portfolio swiftly.
These loans are also outstanding for new investors who want to separate property investments and personal finances.
However, it's preferable to keep exploring different kinds of loans if you want to put down a modest amount of money and incur a low-interest rate on the mortgage or if you want to purchase a sizable, multi-unit building.
Where can I locate a DSCR lender in Broward County, Florida?
Although certain institutions are experts in DSCR lending, most big mortgage lenders tend to avoid these types of loans.
If unsure where to begin, conduct an online search or speak with a local financial counselor. You can also reach out, and we'll be pleased to answer any questions you may have.
(Mar 31, 2023)
