What do you do if you run a real estate investment company and don't have enough funds to buy desired properties? Since shutting down is obviously out of the question, the best action involves seeking loans.
Today, there are numerous loan options for real estate investors in Lafayette County. But few compare to non-QM (non-qualified mortgage) solutions known as DSCR loans. This piece will introduce you to everything you need to know before applying for a DSCR loan.
The sections below will explain why DSCR loans are suitable for investors, explore how these mortgages work, and list must-know eligibility requirements. And as a bonus, we will recommend the best places to invest in real estate in Lafayette County, Florida.
Why Get a DSCR Loan in Lafayette County, Florida?
Let's kick off with a quick overview of DSCR loans.
A DCSR loan is essentially a mortgage that you get depending on your business's perceived ability to repay debt obligations. Lenders determine it using the cash flow that your investment property generates.
With that out of the way, here are several reasons to get DSCR loans in Lafayette County:
No job history verification
As an investor and entrepreneur, borrowing is likely a part of your life. That is so because your ventures may often demand money injection, which you can conveniently get from loans. Not to forget that borrowing often comes in handy when you need to acquire more significant investments and grow your business.
If you've borrowed several loans in the past, you may be familiar with one of the most common requirements demanded by lenders: income and job history verification.
Most financial institutions require borrowers to specify their jobs, positions, and salaries. And when you submit this information, a lender verifies it by contacting your employers and requesting them to validate details and documentation. Why?
Verification enables a lender to determine your loan repayment capacity and lower the chances of defaulting in the future. Moreover, it helps ascertain the exact income you earn and reducing the risk of fraud.
Unfortunately, income and job history verification are often tedious and time-consuming. And to make matters worse, you may be involved in a job that pays cash or has complex income structures. These issues can undermine your ability to get financing in good time.
But DCSR loan programs don't have income and job history requirements. On the contrary, they use your company's revenue to zero in on your creditworthiness. So, taking out a DSCR loan saves you from all the hassles associated with employment and income verification.
Quicker application and closing
As mentioned, conventional loans often require income and job history verification. Although these processes may sound straightforward, the opposite is often true. Take income verification as an example.
Generally, lending institutions verify borrowers' earnings using w-2 forms, bank statements, tax returns, and payslips. W-2 forms alone can take more than a week to be processed. On the other hand, banks can take anywhere from 7 to 10 business days to mail your statements. If a lender requests both, you may spend weeks applying and waiting, which further delays loan acquisition.
As if that isn't enough, some institutions insist on contacting your employer and verifying if the information you've provided is accurate. This process can consume a significant amount of your time, especially if your employer spends a large chunk of their calendar year outside the office.
If you want to apply for a mortgage and receive funding within the shortest time possible, go for a DSCR loan. Since this option doesn't require lenders to check your job history and validate income, the entire application process, from start to finish, is quicker. But that doesn't mean you have to tolerate such delays.
Reasonable credit score requirements
Every investor knows the importance of having a good credit score. An ideal score offers you better chances of enjoying low-interest rates on loans, getting approved for a sizable mortgage, and negotiating with lending institutions.
Now, let's explore the relationship between lenders and credit scores.
Most financial institutions use borrowers' credit scores to isolate creditworthy individuals, sift out those that don't deserve funding, and determine the best interest rates for potential loanees. You will likely be hard-pressed when applying for a sizable business loan if your credit score is below 640.
In the same spirit, DSCR loan programs have minimum credit score requirements, similar to most lenders' average. That means you need at least a 640 credit score to get a DSCR loan from most lenders in Lafayette County and many other regions.
So, if your credit score is below the stipulated threshold, work on it before applying for a DSCR loan. You can do that in various ways. First, try paying down existing credit card balances strategically. Also, ensure you cover all your bills in good time because late payments hurt your score.
High loan amounts
One of the factors that can bring your business to a grinding halt is financial problems. Remember, you need money to start a company, buy inventory, pay rent, acquire equipment, and market your services. Moreover, you can't afford to pay staff wages and grow without this resource.
When faced with extensive financial needs, most companies take out loans and use them to cover whatever is feasible. Most importantly, real estate investors often seek financing when they need more money to invest in land, commercial properties, etc.
As an investor, chances are high that you've sought a loan from an institution only to discover what they offer is far from enough. This experience can be unnerving, especially when your venture demands quick financing.
But gone are the days when investors could only borrow meager sums from financial institutions. Today, you can apply for a DSCR loan and get up to $5,000,000. Such a high mortgage guarantees your business will always enjoy strong cash flow, and you'll always be covered whenever the need to reinvest or expand operations arises.
Are you an up-and-coming real estate investor? If yes, there are several challenges you should expect. First, you may be bombarded by information overload while researching the dos and don'ts of successful real estate investing. You can quickly solve this by taking your time, going through available information, and narrowing everything down to what seems fitting for you.
Besides information overload, you should also prepare for market volatility, income uncertainty, and, most importantly, lots of NOs from different lending institutions. That is so because, as a novice, you are yet to make your bones in this industry and lack most of the qualities lenders want to see, including sufficient collateral.
Luckily, a DCRS loan program can help you sort out one of the biggest hurdles budding investors face: funding. The reason is that these solutions are tailored for different investor levels, ranging from seasoned pros to novices.
How does a DSCR loan work?
DSCR loans are primarily for real estate investors planning to use the cash flow from their ventures to take out mortgages. Most people that prefer not to deal with complicated tax returns, income, job history, and employment requirements find reprieve in these programs.
We said DSCR loan programs don't finance borrowers based on their income. On the contrary, they use your rental income from investors' properties. So, you don't have to worry about getting disqualified solely based on your income.
The DSCR loan application process is relatively straightforward; follow these steps:
As is to be expected, not all lending institutions offer property mortgages like DSCR loans. So, ask the lender you plan to partner with if they support these programs.
Once you've ascertained that a specific institution offers DSCR loans, consult with your team and mortgage experts if need be. That will help you avoid common pitfalls. A professional consultant's input will also help you determine if the loan officer you plan to work with is the best you can get.
2nd Step - Submit property information
After zeroing in on a reputable lender and discussing the topic with your team, you can now approach your loan officer. They will likely give you paperwork to fill out. Ensure you fill in all the correct details without exaggerating or leaving anything out.
3rd Step - Hand in paperwork and close on your loan
If you've ascertained that your paperwork is in order, you can now hand it over to your loan officer. At this point, you may request to be pre-approved and use the confirmation letter from the lender to shop properties. Ensure you view as many as possible and, most importantly, partner up with an experienced real estate agent.
Then go back to your lender and ask them for property appraisal. If the property you picked meets their standards, mortgage underwriting will commence, followed by document signing and loan closing.
How is DSCR calculated?
Lenders calculate your debt-service coverage ratio by dividing your company's net operating income by its total debt service. So:
DCSR= Net Operating Income ÷ Total Debt Service
Here's an example. Suppose your company has a net operating income of $350,000 and your total debt service is $180,000. In that case, your DSCR should be:
350,000 ÷ 180,000= 1.94
From the above scenario, your DSCR should be 1.94.
How to determine DSCR income
Now that you know how to calculate DSCR, the next question is, can you compute the constituent elements separately? Let's start with net operating income.
Calculate the total revenue and subtract operating expenses to determine your company's net income. If you own a building, operating expenses should include the costs of running it and maintenance. Factor in marketing costs, property taxes, utilities, repairs, and management and administration. Therefore:
Net Operating Income = Total Revenue – Operating Expenses
On the other hand, you can determine total debt service (TDS) by adding up all your company's monthly debt obligations and dividing the total by gross monthly income. Then, multiply the number you get by 100. To summarize:
TDS = (Total Monthly Debt ÷ Gross Monthly Income) x 100
Once you've calculated net operating income and TDS, computing your debt-service coverage ratio shouldn't be a problem.
What is the minimum DSCR to qualify in Lafayette County, Florida
Lenders in Lafayette County and many other regions in the US offer DSCR loans to borrowers with a debt-service coverage ratio of at least 1.25. But a select few also consider borrowers with DSCRs that are considerably lower. But to enjoy this advantage, your property must generate substantial cash flow.
Many loan officers don't fund borrowers with a DSCR below 1 because it is a clear indicator of negative cash flow and inability to meet debt obligations effectively.
Besides your DSCR, loan officers can use the following to determine your eligibility:
Ability to pay down payment
Most lending institutions that support DSCR loan programs require borrowers to cover around 20-25% down payment.
The down payment requirements for DSCR loans are considerably higher than those for other mortgages because borrowers often invest in rental properties, which most institutions associated with higher risks.
DSCR loans can help you invest in different property types, including single-family residences (SFRs), condos, 2 to 4-unit properties, modular homes, and planned urban developments (PUDS). Whichever property you choose, it must generate rental revenue that meets or exceeds your lender's coverage ratio requirements.
Considering the above, most lenders don't allow borrowers to use DSCR loans to purchase vacant land, mobile homes, log homes, resorts, houseboats, and boarding houses. Finding an institution offering DSCR loans for spec home projects may also be challenging.
Most DSCR loan programs require participants to have a loan-to-value ratio of at least 80%. The reason is that LTV helps financial institutions assess lending risk before approving your DSCR mortgage application.
If you discover your LTV is significantly lower than the minimum figure set by your lender, try improving it first. Several hips can help you to that end, including increasing your down payment. Remember, the higher the amount you are willing to put down on a property, the higher your chances of enjoying lower loan-to-value requirements.
The best cities and towns to invest in Lafayette County, Florida
Lafayette County is in Florida, and experts consider the Sunshine State's real estate market one of the most profitable investments ever. That is so because, first and foremost, authorities in this state don't charge income tax for real estate investments.
Moreover, this region is well known for lucrative returns and affordable properties. That said, if you want to invest in Lafayette County, Florida, consider the following cities and towns:
Mayo is the only municipality in Lafayette County and the regional county seat. By 2021, this small town had around 1,089 residents. This small town is a popular camping site due to two well-known spots: the Suwanee River Rendezvous and Lafayette Blue Springs State Park.
This enchanting town's laid-back vibe often attracts people from all walks of life. So, you can invest in single-family homes and similar real estate investments and enjoy significant returns.
A day is a census-designated place and unincorporated community located In Lafayette County. It has a significantly smaller population than Mayo. As of 2020, this area had around 89 residents. Despite being undersized and hardly populated, Day has a couple of excellent restaurants, a bed and breakfast, and a locally-owned grocery store.
Like most sparsely-populated regions, Day is ideal for a real estate investor who prefers less competition from other businesses and prioritizes building stronger ties with their clients and the local community.
At this point, you are well-acquainted with DSCR loans. We have done all we can to ensure you know these mortgages, how they work, and why they are a good option. Moreover, our article has shown you how lenders calculate your DCSR, introduced you to the minimum requirements for a DSCR loan and discussed the best places to invest in Lafayette County, Florida.
The ball is now in your court. We hope you'll use our information to become a successful and exemplifiable real estate investor in Lafayette County, Florida.