(Mar 31, 2023)
Read on to learn more about getting DSCR loans in Lee County and how you can quickly build your real estate portfolio.
Why Get a DSCR Loan in Lee County, Florida?
It's no secret that Lee County is one of the best places in Florida to buy a home regarding real estate investing. Solid rents and relatively low home prices make Lee County a perfect region to buy investment homes. And DSCR loans can make it even much easier to purchase rental properties.
These loans don't require you to prove traditional employment or personal income. Your loan could be approved so long as your homes create enough income that can cover your debt payment. Moreover, DSCR loans have a seamless application process, not to mention competitive interest rates, making them suitable for both experienced and new investors.
How Does a DSCR Loan Work?
Debt service coverage ratio loans are non-QM loans that are well-known for their less strict approval processes and requirements compared to conventional loans. Non-QM mortgages can best suit various borrowers, from real estate investors to self-employed individuals. Understanding how DSCR loans work in Lee County is a vital first step.
Instead of presenting employment verification documentation, W-2s, and pay stubs, these mortgages come with alternative requirements that are usually easier to qualify for.
Unlike other non-QM loans, such as bank statements and recent loans, DSCR loans are specifically designed for real estate investors. So, when you secure this loan, you can't use it to buy owner-occupied properties. This is mainly because the debt service coverage ratio measures how well the rental income can clear the debts your investment homes create.
Essentially, lenders are ready to offer DSCR loans for investors to purchase rental properties as long as they use their monthly rental income to pay their debt on time. If your property's rental income isn't enough to help you secure a DSCR loan, you may want to consider other alternatives.
How is DSCR Calculated in Lee County, Florida?
Before you can qualify for a DSCR loan in Lee County, lenders will have to calculate your debt service coverage ratio to determine whether or not you qualify for a loan. They usually base their validation on how much profit investment homes generate compared to the loan payment.
DSCR is always expressed in decimal format, e.g., 1.30 or 1.30x. For instance, properties with a DSCR of 1.30x have 30% more cash flow than is needed for the monthly payment.
Here's how you can calculate the debt service coverage ratio and get the above figures (1.30): DSCR = Income / Payment
Below are examples of residential homes with a 1.30 DSCR.
| Income | Payment | DSCR |
|---|---|---|
| $2,600 | $2,000 | 1.30 |
| $2,210 | $1,700 | 1.30 |
| $1,820 | $1,400 | 1.30 |
| $1,430 | $1,100 | 1.30 |
How to Determine DSCR Income
You'll need the monthly rental income for residential investment properties to determine the DSCR income. For commercial properties (office buildings, 5+ unit homes, etc.), however, you'll have to look at the NOI (Net Operating Income) over the previous 12 months.
This factors in property expenses, such as maintenance, repairs, and professional management.
How to Determine DSCR Payment
For residential properties, DSCR loans use the proposed principal and interest rate for your new home, property taxes, homeowner association (HOA) fees, insurance, and other dues. The total of all these is the DSCR payment part of the calculation.
How higher rent can help improve your DSCR
As you examine your deals, see whether there's an opportunity to increase the rent. With an appraiser's rent estimate, your lender can allow you to use the proposed income on your investment homes.
| Income | Payment | DSCR |
|---|---|---|
| $1,600 | $1,415 | 1.13 |
| $1,700 | $1,415 | 1.20 |
How a lower payment can help improve DSCR
While condos are standard in Lee County, they often come with high homeowner association dues. So in some cases, you might be better off paying a higher price for single-family homes with no association dues.
Remember that association dues must also be included in the debt service coverage ratio calculation.
Home Type - Condo
- Income - $1,900
- Principal, Insurance, Tax, Interest - $1,000
- Association Dues - $400
- DSCR - 1.36
Home Type - SFR
- Income - $1,900
- Principal, Insurance, Tax, Interest - $1,300
- Association Dues - $0
- DSCR - 1.46
Remember, the higher your DSCR, the higher your chances of being approved for a DSCR loan in Lee County. To drive up the DSCR, find ways to reduce your monthly payment, increase property income, or both.
What is the Minimum DSCR to Qualify in Lee County, Florida?
To secure DSCR loans in Lee County, you must have a debt service coverage ratio that meets a specific threshold. While different lenders come with their minimums, this is always a requirement.
Most lenders usually look for a minimum DSCR of 1.25 or more, meaning you must have 25% more cash flow than its all-inclusive payment. Some may accept minimums of as low as 1.0 or even 0.75.
To get the best terms and rates and protect your property from losing money each month, it's always wise to aim for a minimum DSCR of 1.25 when looking for the best deal for your needs.
DSCR Loan Guidelines in Lee County, Florida
As mentioned earlier, DSCR loans in Lee County are always easier to apply for and qualify for than traditional financing. Besides being one of the only low-doc mortgages available in today's marketplace, these loans don't require you to provide tax returns or any other income verification documents.
However, lacking such requirements doesn't mean anyone can qualify for the loan. In addition to meeting a specific DSCR threshold, other general requirements can vary from one lender to the other.
Loan-to-value (LTV) ratio
DSCR lenders in Lee County need at least 20-25% down or a maximum LTV of 75-80%. For a refinance, prepare for about 20-25% current equity in your investment homes.
Credit/FICO score
A credit score predicts how likely borrowers will repay their loans on time. The higher your FICO score, the better you look to potential lenders.
Most lenders in Lee County need a credit score of 640 for a DSCR loan. However, some may require higher scores, so the higher your credit score, the higher your chances of securing a loan.
Loan purpose
DSCR lenders allow you to refinance, purchase, or take out cash with debt service coverage ratio loans as long as you meet other requirements.
Verifying your home's future rental income
You need an appraiser to settle a Single-Family Comparable Rent Schedule as part of the qualification process. The Fannie Mae Form 1007 determines how much revenue your home makes and whether it will be sufficient to cover loan payments.
Property types allowed
1-4 unit residential buildings and 5+ unit commercial properties are eligible for DSCR loans. These loans are also available in other commercial apartment buildings, such as office buildings. Some lenders will even accept non-warrantable condos.
Property use
Since DSCR loans are specially meant for investment properties, you can't buy a property you intend to live in with your family. Short-term rentals, such as VRBO or Airbnb, long-term rentals, and other home rental formats are eligible.
Loan Type
DSCR loans are available in various types, including 5-year adjustable rates, 30-year fixed rates, and interest-only ARMS.
Income and employment, debt-to-income (DTI) ratio
There's no DTI requirement since no employment or personal income verification is needed. Instead, lenders in Lee County look at your home's cash flow and loan payment amount to determine whether you're eligible or not.
So, if you have too many write-offs on your tax returns or want to avoid the hassle of providing two years of complex returns, DSCR loans might suit you best.
Maximum loan amount
Some lenders in Lee County offer debt service coverage ratio mortgages up to $5 million. However, the most common loan limits are $2-3 million.
Maximum properties owned
Unlike Freddie Mac and Fannie Mae loans, lenders don't impose limits on how many financed investment properties DSCR loan borrowers can own. You have access to unlimited properties and loans.
Prepayment penalties
Many DSCR loans usually have prepayment penalties, meaning borrowers will be obliged to pay a specific percentage of their original mortgage amount if they refinance or sell the loan too early. Remember, this penalty could be costly, so ensure you'll have your mortgage for the minimum required time.
Closing your loan in the name of an LLC
Closing your loan in the name of an LLC is allowed by many DSCR lenders in Lee County.
The seller paid closing costs
Most sellers are often allowed to pay a specific percentage of closing costs. Consider checking with your lender to see whether or not they allow seller-paid closing costs.
DSCR Mortgage Rates in Lee County, Florida
DSCR mortgage rates in Lee County are usually higher than loan rates for traditional mortgages.
Expect to pay about 1-2% higher for a DSCR mortgage versus standard Freddie Mac or Fannie Mae loans. Although these rates might seem high, they're a bargain, especially when you consider there's no need to provide W2s, tax returns, and other personal income verification.
The 5 Best Cities to Invest in Lee County, Florida
There is no shortage of great cities to invest in Lee County. This county is highly desirable for real estate investors, renters, and homebuyers alike, as it provides them with various locations and property choices. From short-term rentals to urban apartments to single-family investment homes in the suburbs, there's a location and a property for everyone.
Interested in finding the best cities in Lee County to invest in real estate but don't know where to start? We've got you covered. Below, we'll talk about the 5 red-hot areas you want to try out.
Cape Coral
Founded just 65 years ago, Cape Coral city was established as a planned community, and since the late 1950s, its population has grown rapidly to about 200,000 residents. This city has even been recognized by Forbes as one of the hottest housing markets in Florida, making it a perfect region to buy investment properties in Florida.
You'll also be glad to know that low vacancy rates have significantly contributed to a 20% year-over-year increment in rent. Plus, there's a high demand for office space. According to the National Association of Realtors, about 19,000 individuals moved into Cape Coral, occupying 4,300 rental units within the last 12 months. In 2020, tenants occupied about 200,000 square feet of office building space.
Fort Myers
Situated between Miami and Tampa, Fort Myers is a fast-growing city on Florida's Gulf Coast. Also known as the City of Palms, Fort Myers has long lured vacationers, thanks to its proximity to white sand beaches, lush vegetation, and year-round warmth. Aside from attracting notable visitors, these qualities have also helped lure new residents to this city.
Driven by rising household incomes, home prices have continuously increased in the City of Palms over the past few years. However, Fort Myers's real estate remains less expensive than other cities in Lee County. For instance, you can find investment properties well below national and state averages in the rural parts east of Fort Myers.
Sanibel
There's no denying that Sanibel Island comes with a magic of its own, and anyone who visits inevitably looks forward to putting down permanent roots.
Generally, the cost of living on this island is about 69% higher than in other cities in Lee County. This is mainly because the average price of homes on the island is about three times Florida's average.
Despite the high charges, most people who live here admit that it's money well spent. The city is situated 20 miles from Fort Myers, and its strict building codes make it stand out as one of the most scenic communities in Florida.
Bonita Springs
Bonita Springs is situated approximately 105 miles to the west of Miami and about 20 miles Southeast of Cape Coral. It's found in both the Gulf of Mexico and Estero Bay.
The cost of living here is slightly higher than the state and national average. House prices are the main culprit, with a median property cost of $397,500, about $100,000 above the national ($291,700) and Florida ($294,900) average. Rent is also slightly above the national average.
If you're considering investing in Florida's Gulf Coast in the future, Bonita Springs deserves the first spot on your list. Aside from making profits and expanding your real estate business, you'll have unlimited access to scenic beaches, great restaurants, wilderness areas, and golf.
Lehigh Acres
For families with kids, accessibility to nearby daycare centers, playgrounds, and parks, not to mention highly-rated preschools, is vital. Lehigh Acres boasts many parks and playgrounds, offering excellent recreational facilities for kids and adults. There are also plenty of options for daycare, including Harvest Christian Academy and Mama Bear Productions.
Looking at the housing market, the median listing home price here was $350,000 as of September 2022, trending up 32.1% year-over-year. The median property sold price was $311,000, and the median listing property price per square foot was about $213,000.
Leigh Acres boasts 8 neighborhoods. Westminster is the most expensive neighborhood, with a median property price of $389,500. On the other hand, Parkdale has a median listing price of $330,000, making it the most affordable neighborhood in Leigh Acres.
Are DSCR Loans Right for You?
DSCR loans in Lee County, Florida are a viable option, especially if you need assistance investing in real estate. They offer flexible loan solutions and come with competitive rates and a straightforward application process to make it as seamless and painless as possible.
So, if you're planning to invest in real estate, reach out to your lender to get started with your debt service coverage ratio loan in Lee County today.
(Mar 31, 2023)
