With this loan, you can finance more than one property since the lender will determine your eligibility based on the property's expected cash flow. In the sections below, we have covered more about DSCR loans in Jefferson County, Florida.
What are DSCR Loans?
Debt-service coverage loans, or DSCR loans, are a real estate financing solution offered by many lenders across the United States. Unlike conventional mortgages, DSCR loans are optimized for real estate investors looking to buy and lease or sell a property for a profit. For this reason, the loan comes with slightly different eligibility requirements favorable to investors at different experience levels.
Before choosing a DSCR lender, it's essential to understand the different terminologies and aspects of a DSCR loan. For instance, you need to familiarize yourself with terms such as net operating expenses, coverage ratio, current debt obligations, and certain operating expenses. We have highlighted these and more in the section below.
How Do DSCR Loans Work
As the name suggests, debt-service coverage is a ratio of two critical financial indicators: the property's net operating income and total debt obligation. In simpler terms, DSCR measures a firm's or business's financial health and ability to take on new financing, repay loans, or even make dividend payments.
In the real estate world, lenders use DSCR to understand an investor's creditworthiness and the level of risk they present. Since a DSCR is a ratio, it's often presented as a decimal, where a DSCR of more than 1.0 shows that the investment property makes more money than the total amount paid to settle debts.
On the other hand, a DSCR less than 1.0 shows that the investment property has more debt obligation than the income it generates. Hence, it poses more risks to the lender and may not be a good investment. When calculating DSCR, different lenders target different metrics, and it's essential to understand how each metric affects your eligibility for the loan.
Differences often occur when calculating principal repayment and capital lease expenses. Another common confusion is whether to use EBIT or EBITDA when determining DSCR. EBIT is an abbreviation for earnings before interest and taxes, while EBITDA refers to earnings before taxes, interest, depreciation, and amortization.
Below are the standard techniques used to calculate the various DSCR loan metrics and what this means to your loan eligibility status.
How to Calculate DSCR Loan
Most lenders in Jefferson County use the net operating income and the total debt service to calculate the DSCR. Net Operating Income or NOI is the total income from a real estate property before factoring in taxes, interest, depreciation, or amortization.
In other words, most lenders use EBITDA as the net operating income. Similarly, total debt service, or TDS, is the sum of recurring loan payments, including principal, interest, sinking funds, and lease buyouts.
To get the coverage ratio, you divide EBITDA by TDS. The minimum DSCR in Jefferson County is 1.25, but this may change from time to time. If your property's coverage ratio is more than 1.25, you are more likely to be accepted by most lenders. Otherwise, you may need to put more money down or incur a higher interest rate.
How to Determine DSCR Income
DSCR income is the Net Operating Income your real estate property will generate monthly. The amount could include rental income, income from businesses within the premises, car parking fees, and even income from open spaces you've leased out. NOI is calculated as the total income from the property minus the property expenses, including maintenance and management fees.
Most lenders will typically consider the property's NOI over the next 12 months to determine your eligibility for a DSCR loan. The DSCR income will vary from one property to another based on factors such as the number of residential units, location, etc.
How to Determine DSCR Payment
DSCR payment is the total amount of money you pay monthly for your real estate investment. The money includes the loan's principal and interest, taxes, insurance, and homeowners association (HOA) fees.
Approximating the DSCR payment often leads to incorrect figures since different properties and locations have varying tax rates, insurance policies, HOA fees, etc. To know the exact DSCR payment figures, you should consult your lender.
Lowering your DSCR payment can significantly raise your coverage ratio and benefit from lower interest rates. To do this, you should put more money down and find ways to lower the property management and maintenance fees.
DSCR Loans Qualification Criteria in Jefferson County, Florida
Before qualifying for a DSCR loan in Jefferson County, you must meet some eligibility requirements. Besides the minimum coverage ratio of 1.25, here are the other DSCR loan qualification requirements:
Credit Scores
Credit or Fico score is the measure of your creditworthiness. A higher Fico score indicates that you are less likely to default on the loan. When calculating your credit score, lenders look at your loan history, the amount of money you borrowed last, repayment history, etc. A credit score of 620 and above is ideal for most DSCR lenders.
However, others may require a minimum Fico score of 640, especially if you paid a down payment of less than 20% of the property's value. You can raise your credit score by repaying any outstanding debts, correcting any errors or false reports associated with your credit account, and avoiding late payments on your current loans.
Cash Reserves
Like most banks and private lenders, DSCR loan lenders require reasonable cash reserves to settle monthly loan payments for 6 to 12 months.
Cash reserves assure the lender that you won't default on the loan as soon as the property fails to generate enough income to repay the loan.
Property Eligibility
DSCR loans are popular among real estate investors and can only be used to finance income-generating real estate properties.
These loans are much more accommodating, allowing investors to finance non-warrantable condos, commercial buildings, high-end residential apartments, and multi-unit properties. This is one of the many reasons investors choose DSCR loans over other financing options.
Loan to Value (LTV) Ratio
LTV is a ratio of the down payments against the property's value. If a lender offers an 80% LTV, you must put down 20% of the property's value before they can approve the loan. Several factors determine the LTV offered by different lenders.
The lower the LTV, the more down payment you'll pay, and the lower the interest rates and subsequent repayment towards the loan. Always explore your options and understand your tradeoffs before choosing a lender with low or high LTV ratios.
Why Go for DSCR Loans in Jefferson County, Florida
DSCR loans offer several benefits to real estate investors looking to grow their portfolios without the restrictions of traditional mortgage lenders.
Several benefits await you if you want to invest in Jefferson County, Florida. We have discussed some of these benefits below.
Growing Real Estate Market
Located in the northern part of Florida, residents of Jefferson County enjoy quality living, marked by unspoiled natural beauty, tropical climate, historical treasures, and awe-inspiring landscapes. The county has a growing real estate market, popular among retirees and families who enjoy countryside living.
Over the years, Jefferson County has seen an influx of new homeowners from different cities within the Golden State and neighboring states such as Georgia.
The county's transportation system, social amenities, and development landscape are improving every other year. And this has inspired new and seasoned investors to pay attention to the growing opportunities this rural Florida County offers. This is the perfect spot to set up your real estate portfolio if you are into residential homes, vacation rentals, or countryside villas.
Ease of Access
Anyone who meets the eligibility requirements and has the knowledge and passion for venturing into real estate investing can get started with the help of a DSCR loan.
Due to the minimum eligibility requirements and flexible financing, DSCR loans welcome both seasoned and first-time investors.
Faster Application and Approval
DSCR loans often have a faster application and closing process than conventional mortgages since there's no lengthy document verification and underwriting.
With a DSCR loan, you don't need to give out your paystubs, debt profile, payment history, work history, etc. You must demonstrate that the property you want to purchase is a profitable investment.
Unlimited Cash-Out
Unlike conventional mortgages, where the money you can withdraw at a given time is capped, DSCR loans are much more flexible. If you have to pay a sizeable amount to a contractor or supplier, you can do so as a lump sum.
That also means you can make significant payouts without making special arrangements with the lender if significant expenses come up suddenly.
Multiple Property Options
As noted earlier, DSCR loans allow you to finance different property types, from condos and multi-unit residential homes to business premises and even land.
This allows different investors to build their real estate portfolio with the available wealth and in a location or property type they prefer.
The Best Place for Real Estate Investments in Jefferson County, Florida
Jefferson County has some of the best rural neighborhoods in entire Florida. The expansive tracks of land, numerous waterbodies, and unique landmarks make this county an ideal residence for nature lovers, retirees, and those looking for a relaxed countryside-inspired lifestyle.
Here are the four areas you can explore as an investor as you find the perfect investment properties.
Monticello
This is the only city in Jefferson County that serves as the official county seat. According to the 2020 census, there were approximately 2,600 residents in the city, with a median household income of $28,720. The city is home to several historic buildings and landmarks that dates back to the mid and late 1800s.
As a city, Monticello has several social amenities, from state parks and county trails to hospitals, shopping centers, and learning institutions. The median home price in Monticello, Florida, is $269,240, a 20.5% spike over the past year.
Wacissa
Located southwest of Monticello, Wacissa is a census-designated place in Jefferson County, Florida. The area shares its name with the renowned Wacissa River, located one mile to the south. As of July 2021, Wacissa had 418 residents spread across a total area of 4.2 square miles.
This is up 15% from a total of 362 residents in 2020. The area enjoys a tropical climate, impressive outdoors, and peaceful neighborhoods ideal for families and retirees. The current median home value in Wacissa, Florida, is approximately $113,500.
Waukeenah
Waukeenah is a census-designated place in Jefferson County located 11 miles southwest of Monticello and 20 miles east of the state capital, Tallahassee. As of 2020, approximately 260 people lived on 3.2 square miles of land. The area is known for its prime tourist activities, thanks to the numerous attractions and ease of access from Tallahassee.
As a key tourist destination, holiday homes, hotels, and countryside villas are some of the most popular investments in the area. The median home listing price in Waukeenah, Florida, is $325,000 but can go up to $800,000.
Lloyd
Located in western Jefferson County, Lloyd is a small census-designated place that recorded 190 residents per the 2020 U.S. national census. The area is known for its numerous outdoor activities and attractions, from camping and hiking to water sports, fishing, and hunting.
Over the years, Lloyd has seen an influx of new homeowners, attracted by the serene atmosphere and relaxed countryside living. The median home listing price in Lloyd, Florida, is $322,000 but can run into millions of dollars, depending on the specific location, adjacent views, and property type.
Bottom Line
DSCR loans are a practical real estate financing solution that makes investing quite convenient. People with complex income streams or those looking to invest in multiple properties simultaneously often find it hard to secure financing with traditional mortgage lenders. This is where DSCR loans steal the show. With flexible lending terms, faster turnaround times, unlimited cash-outs, and multiple property options going for a DSCR loan is a no-brainer.
To build your real estate portfolio in Jefferson County, Florida, you should keenly choose your lender to ensure you get the best deal possible. Your first step is to explore the different real estate markets and determine if they meet your investment goals. The four places highlighted above are promising markets you can begin your research on.
Afterward, you should approach your local lender to check your DSCR and whether you meet the other qualification requirements. If you have questions concerning DSCR, NOI, or TDS calculations, ask for proper clarification and how these aspects affect your eligibility.
