(Mar 20, 2023)
This article covers all you need to know about DSCR loans in Calhoun County, Florida.
What are DSCR Loans?
Before we look at DSCR loans and how they operate, we must first understand what a DSCR is. In the real estate investing world, the debt-service coverage ratio is a financial ratio that compares the amount of money a property generates to the amount of money it takes to operate it. It measures how much money a property generates after paying all expenses.
A debt-service coverage ratio of more than 1 means more money coming in than going out, which is typically considered "good" for the investor and the lender. This is because the property can comfortably pay off the loan, and you can make payments on time. Most DSCR lenders will require borrowers to have a DSCR of at least 1.25x to receive the financing.
How Does a Debt Service Coverage Ratio Loan Work?
As noted earlier, a DSCR lender will focus mainly on your property's cash flow to determine whether you are eligible for the loan. Therefore, the first step to securing this financing is to find a great real estate investment opportunity.
You'll also need to meet the minimum DSCR requirement set by the lender and other qualification requirements. These often include a minimum down payment of 20% of the property value, credit score requirements, etc.
The higher your DSCR figure, the easier it is to secure the loan. This is because of the reduced risk of defaulting on the loan. Some lenders may also fund real estate investments with lower DSCR, but the borrower will incur a higher interest rate, and they may need to put more money down.
Before choosing a DSCR lender, you need to understand their requirements and how they affect your loan eligibility and repayment. A ridiculously low DSCR is not always good, as it could translate to costly interest premiums over the loan term.
How is Debt Service Coverage Ratio Calculated
DSCR is calculated by dividing the total income generated by the property by its total debt obligation. The formula for calculating this ratio is DSCR = [Net Operating Income /Total Debt Service (TDS)]. For investors and lenders alike, DSCR is helpful as it indicates how much of a property's monthly income goes towards paying off the loan and how much is left over to cover other bills.
Net operating income, or NOI, is the amount you make from your real estate property minus the costs. It's calculated by subtracting expenses from the property's operating income, including maintenance, insurance, and loan payments. On the other hand, TDS is the amount of money the property owner or borrower must pay each month towards the loan principal and interest.
How is DSCR Income Determined
DSCR income is determined by your gross monthly income from the real estate property and the monthly expenses. In other words, your DSCR income is the net operating income after deducting all the expenses. Income from your rental property may include rental income, income from businesses within the premises, parking fees, etc.
When calculating the DSCR income, it's essential first to understand what factors determine the DSCR. Operating expenses are the money you spend to run the real estate investment, including management fees, maintenance, and repair costs. Other expenses in this category are principal and interest payments, property taxes, and insurance premiums.
How to Determine DSCR Payment
DSCR payment is the amount you pay monthly towards the loan and other essential costs that come with owning the real estate property. Typical DSCR payments include loan principal and interest, property taxes, insurance premiums, and homeowners association fees. The best way to accurately know the exact figures of your DSCR payment is to consult your lender.
Most lenders have different approaches to calculating DSCR, ultimately affecting your DSCR income and payment. If your property generates rental income, you should find ways to lower the payment. One of the few ways to do this is to make a larger down payment such that the interest calculations will be based on a smaller loan amount.
Similarly, you can find ways to lower operating costs and increase rental income. This also raises your DSCR, which may help boost your loan eligibility with many lenders, some of whom may offer attractive rates.
The Minimum Debt Service Coverage Ratio in Calhoun County, Florida
Like in most counties in Florida, the minimum DSCR for Calhoun County is 1.25x. That means your rental property must make 25% more income than the expenses. And while this figure is common among most lenders, some may offer slightly lower or even higher DSCR requirements.
Typically, a lower DSCR requirement means you'll incur higher interest rates, but a higher DSCR requirement doesn't necessarily mean the lender has the best interest rates. Some lenders are more risk-averse and will raise the DSCR requirement to ensure they are attracting experienced or well-established investors. This is quite common with new lenders.
The more tenured lenders who have built a reputation in the market are more likely to lower the DSCR requirement to accommodate most investors. They may not be so risk-averse because they understand the market better, and perhaps they have diversified their investments to hedge on potential risks. Be sure to talk with your lender to know their minimum DSCR and how this affects your monthly payments.
Why Go for a DSCR Loan in Calhoun County, Florida?
Calhoun County has a lot to offer whether you are a seasoned real estate investor or a newbie. Its growing population and low unemployment rate mean there's a ready market. But first, you need to secure the right financing. Here are the many reasons why you should consider a DSCR loan program.
The Lender Does not Consider Your Job History and Personal Income
Your income and job history are critical to your loan eligibility for almost all other kinds of loans. With these loans, the lenders will use your income and employment history to determine your repayment capacity.
This is not the case for DSCR loan programs; here, lenders are not interested in your income. Instead, they are interested in the revenue generated by the investment property. So if you want to avoid the hassle of proving your income and employment history, then a DSCR loan is a great way to build your real estate portfolio.
Quicker Closing Period
As stated above, other conventional loans will require income verification. Lenders require documents such as bank statements, w-2 forms, payslips, or tax returns to verify your income. Such documents may take up to weeks to be processed.
In addition, the lender will need to verify that the information you've given is accurate. Typically, this also takes a lot of time. DSCR loans will help you avoid long wait times, allowing you to secure and close investment deals faster.
High Loan Amounts
DSCR loans help real estate investors get more money than they could with a traditional mortgage. With these loans, you can qualify for up to $5 million at once, which is enormous compared to conventional mortgages, where you'll need to apply for separate loans to get such an amount.
Debt Service Coverage Ratio Loans Qualification Requirements in Calhoun County, Florida
Like other loans, DSCR qualification requirements are meant to ensure that borrowers have the financial capability to repay their loans. As noted earlier, DSCR lenders consider your property's average gross income and total monthly debt obligations (including principal and interest).
DSCR is often marketed as a no-doc way to secure your investment financing. And while this is true in that there are reduced paperwork requirements, you'll still need to prove your loan eligibility in several ways. Below are the other DSCR loan qualification requirements you must meet to secure the necessary financing.
Credit Score Requirement
Credit or Fico score is a number that reflects how likely it is that you'll be able to afford/repay a loan. It's often calculated by considering your loan payment history amount of debt you owe, among other factors. DSCR lenders require borrowers to have a credit/FICO score of at least 640. The higher the score, the easier it is to qualify for a loan.
If your credit/FICO score is below the threshold, you should take some time to boost it before applying for a DSCR loan. To do so, you should pay off as much debt as possible and quickly as possible. You can also review your credit reports to check if any errors or incorrect reports are tied to your account. Correcting any false claims can help boost your Fico score.
Loan-to-Value (LTV) Ratio
The LTV ratio measures how much of the property's value is to be financed by the DSCR lender. A high LTV ratio means the lender will finance a more significant portion of the property's value; hence you'll put less money down. The disadvantage of a high LTV ratio is that you'll incur higher interest rates on a substantial principal amount, which could make the loan very expensive over the loan term.
When buying a property, you should avoid expensive renovations and upgrades. Most DSCR lenders in Calhoun County, Florida, have a maximum LTV ratio of 80%, meaning you'll need to put down 20% of the property value to be considered for the loan. The more down payment you make, the better.
Property Requirement
With DSCR loans, you can finance different property types, provided they are not primary residential homes. When you apply for a DSCR loan, the lender will want to know the kind of property you want to finance. The investment property can be a single-family unit, duplex, four-unit house, etc. There are also no strict rules on the location of the property or how it should look, etc.
Since DSCR lenders can finance properties up to $ 5 million, you can invest in luxury apartments, business premises, an extensive tract of land, etc. The property you want to invest in should make financial sense.
Cash Reserves
Cash reserves are the excess of your available cash on hand, including the cash in your bank account or the form of stocks and bonds. DSCR lenders will evaluate your cash reserves to ensure you can meet your debt obligations for 6-12 months before the investment property can begin regenerating reliable income.
Ideally, you would want to begin saving money a few months before applying for a DSCR loan. If you don't have enough cash reserves, you may not qualify for the loan since the lender will assume a high risk if the investments flop for a couple of months or years before they can regenerate enough income.
The Best Areas to Invest in Calhoun County, Florida
When starting with real estate, it can be hard to know where to invest. You might want to buy a house, apartment building, or even a plot of land for your new business, but where should you look?
In Calhoun County, Florida, there are plenty of towns and neighborhoods where you can invest in. Ideally, you should look at things like the local economy, local demographics, the local real estate market, and your investing goals and preferences.
With all these in mind, we have highlighted four areas ideal for real estate investing in Calhoun County, Florida.
Blountstown City
Blountstown City is the county seat of Calhoun County and one of the main areas to explore when looking for the perfect real estate investment. According to the 2020 census, the city had a population of 2,266 with a median household income of $23,271. The city enjoys a decent transport network, plenty of social amenities, and an actively growing real estate market.
For investors looking to invest in this city, residential homes are one opportunity to consider. The area offers a serene, rural lifestyle that offers residents convenient access to primary services and fun outdoor activities. The current median home listing price in the city is $220,000.
Altha Town
Altha is a small but growing town in Calhoun County, Florida, located in northwestern Florida, approximately one hour from the Alabama state line and 45 minutes from the Georgia state line. The town had a population of 500 people in 2020, most being employees in the nearby Oglesby Plants International.
Altha town has a median household income of $32,223, and the median home listing price is $148,450. The town has seen a couple of new real estate developments over the years. New homeowners from neighboring counties also have occupied the town, thanks to the serene neighborhoods, favorable weather, and plenty of social amenities.
Carr Community
Carr Community is an unincorporated community in Calhoun County, located on State Road 73. The community is known for its serene neighborhoods, welcoming locals, and numerous schools and churches, making it an attractive spot for young families and retirees.
Carr community offers a lively rural-suburban mix, extensive tracts of land, and favorable weather all year round. The median household income in Carr Community is $32,800, while the median home listing price is 229,000.
Chipola
Chipola is a small unincorporated community in Calhoun County, Florida, located next to the Calhoun County Airport. The area is known for its rural lifestyle, peaceful neighborhoods, and numerous fun outdoor activities.
This region is also close to Chipola River, which offers residents an opportunity to enjoy fishing, wildlife viewing, primitive camping, and paddling experiences. The median household income in Chipola is $37, 450 and the median home listing price is $200,000.
Bottom Line
Now that you know DSCR loans and how they work, you want to choose a DSCR lender with favorable lending terms. Typically, you want to compare options and highlight critical factors such as the DSCR and credit score requirements, LTV ratio, and the minimum cash reserves required.
That said, Calhoun County, Florida, offers several opportunities to real estate investors looking to build or expand their portfolios. The areas we have highlighted above are a few of the many places you can explore within the county. Talk to your local lender today and secure the funding to finance your dream investment.
(Mar 20, 2023)
