These investors rely on varying funding methods, of which DSCR loans could be the easiest and most convenient funding solution. Here is a comprehensive overview of everything you need to know about DSCR loans in Madison County, Florida.
Why Get a DSCR Loan in Madison County, Florida?
There are many compelling reasons why a DSCR loan is preferable to other mortgage alternatives in Madison County, including:
No Income Verification
Eligibility for ordinary mortgages is based on many factors, primarily personal finances. Lenders usually require documents such as your income statement, pay stubs, tax returns, W2 forms, and credit history to verify your income and personal finances.
Unfortunately, obtaining the required documents usually takes some time and work. Ensuring all the information is accurate and up to date can also prove challenging. This verification method can also limit your access to the loan, especially if you don't have enough cash or liquid assets.
A DSCR loan is a non-qualified mortgage, and eligibility is based solely on the cash flow generated by the investment property. The lender doesn't need to review your finances and documents – this also means that you don't have to worry about having enough cash or liquid assets. However, you still need to provide documents related to your real estate business or investment property.
Fast Closing Times
Verifying your finances and documents usually takes time, as all lenders prioritize diligence over speed to avoid falling victim to fraud. The verification process can take months, which is frustrating when working towards a real estate investment with limited time.
DSCR lenders don't evaluate your finances when determining your eligibility for the loan. The application and verification processes are streamlined and smooth, facilitating faster closing times.
High Loan Offers
Ordinary mortgage lenders usually limit their loan offers to how much you can pay based on your finances. You must have substantial cash and liquid assets to qualify for large amounts.
Fortunately, your cash and liquid assets don't matter when applying for a DSCR loan. Technically, you can qualify for higher loan amounts if the investment property generates a healthy cash flow, regardless of the size of your finances.
It is also worth noting that you can commit your DSCR loan to many investment properties simultaneously, increasing your leverage for negotiating higher loan amounts. Interestingly, some lenders offer as much as $5,000,000.
Ordinary mortgages come with limited cash-out options, and you must take out a new, larger loan to cash out. In contrast, DSCR loans come with unlimited cash-out options, meaning you can take out as much money as you want.
This is a highly convenient feature for borrowers who may need quick cash to cover large and unexpected expenses.
Available for Novice & Seasoned Investors
Some lenders are weary of approving new real estate investors for mortgages, especially when the latter's finances are limited.
Fortunately, experience is not a factor when evaluating your eligibility for a DSCR loan, making these loans accessible to novice and seasoned investors. This feature is incredibly convenient for new investors with limited funding options.
How Does a DSCR Loan Work?
DSCR is an acronym for Debt-Service Coverage Ratio. It refers to the ratio of cash available to service your debts – lenders use it to determine whether you have access to enough cash flow to pay off your loan. A high DSCR score implies that you have access to enough money to pay off your loan without difficulty, while a low score implies the opposite.
A DSCR loan is a non-qualified mortgage (non-QM) designed for mortgage brokers and real estate investors. A non-QM mortgage differs from an ordinary mortgage in that you don't need to verify your income or other factors (such as employment and income) to qualify for the loan.
Instead, the lender evaluates your ability to service the mortgage based solely on the cash flow generated through your investment property – this is the main requirement, albeit your lender may have other requirements.
More precisely, a lender evaluates your ability to repay your DSCR loan based on the property's Net Operating Income (NOI). NOI refers to your investment property's gross revenue minus its reasonably necessary operating expenses.
DSCR loan application process in Madison County, Florida
Overall, qualifying for a DSCR loan is easy if you meet the requirements. Here is a step-by-step overview of the loan application process:
Step 1 - Finding a Lender
Not all lenders offer DSCR loans and those that do have varying requirements (some more stringent than others). Fortunately, many lenders in Madison County offer DSCR loans.
It is important to find a lender that not only offers DSCR loans but also has requirements that you can satisfy, depending on factors such as your investment property's NOI.
Some of the most important factors to consider in a DSCR loan lender include fees, loan value, repayment terms, and approval times.
Step 2 - Evaluation & Documentation
The next step involves underwriting and documentation. The lender will begin by outlining your loan's aspects, including its value, repayment terms, and fees. They will then give you several forms to fill out and ask for certain documents to evaluate your eligibility for the loan.
The forms and documents required for a DSCR loan application focus solely on your investment property or business, not your finances. Providing all the documents and information required for a smooth evaluation process is essential.
Step 3 - Submission & Closing
The final step involves submitting your documents for evaluation. DSCR loans are quicker to evaluate than ordinary loans because the lender doesn't review your finances. The lender will offer you a loan estimate if you qualify – the estimate should cover all essential details, including interest rates, monthly payments, closing costs, and more.
Reviewing the loan's terms and conditions carefully before responding is essential. The lender will conduct a property appraisal if you agree to their offer, after which you can close the deal.
How is DSCR Calculated?
Calculating your Debt-Service Coverage Ratio is fairly simple - divide your Net Operating Income (NOI) by the total debt service.
In other words, DSCR = NOI ÷ Total Debt Service.
On the one hand, total debt services refer to the sum of interest payments, sinking funds, and principal payments. On the other hand, NOI refers to your investment property's total revenue minus operating expenses such as capital expenditures.
Many lenders calculate NOI based on the EBITDA - CAPEX formula. On the one hand, EBITDA is an acronym for Earnings Before Interest, Taxation, Depreciation, and Amortization. On the other hand, CAPEX is an acronym for Capital Expenditures. Therefore, NOI = EBITDA minus CAPEX.
How to Determine DSCR Income?
Determining DSCR income is simple, too. However, the determining factors depend on the investment property type - residential or commercial.
DSCR income for residential properties is based on the property's monthly rental income, while income for commercial properties is based on NOI.
How to Determine DSCR Payment?
DSCR monthly payments for rental properties are based on PITIA (principal, interests, taxes, insurance, and HOA fees). However, PITIA doesn't have to include HOA fees if the rental property is not part of a Homeowners' Association.
It is worth noting that low monthly rental income and high monthly payments can reduce your DSCR. Overall, it is advisable to increase your rental income and reduce your monthly payments for a higher DSCR score.
What is the Minimum DSCR to Qualify for in Madison County, Florida?
Many mortgage lenders in Madison County also offer DSCR loans, each with varying requirements. Overall, the average DSCR score to qualify for a DSCR loan in Madison County, Florida is about 1.25X – however, some lenders could be willing to lend to borrowers with a DSCR score of 1X.
Fortunately, a low DSCR score is not fixed – you can improve your DSCR by doing the following:
Decrease your investment property's operating expenses.
Increase your investment property's net operating income.
Decrease your borrowing amount.
- Pay off some or all of your debts.
Decreasing your borrowing amount is the easiest way to increase your DSCR score, albeit it can be a tricky compromise. You can also consult a professional to advise you on this and other matters related to your DSCR loan application.
The Best Cities to Invest in Madison County, Florida
Florida's real estate market has been performing incredibly well over the recent past, and that trend is expected to continue for the foreseeable future. Home values across the state increased by about 78% over the past five years, and median home values increased by about 33.1% over 2021, despite the effects of the pandemic and the slumping U.S. economy.
Madison County is one of Florida's best locations to invest in real estate. The county has four cities with well-performing real estate industries. Here is an overview of these cities' real estate markets:
Madison is the largest city in Madison County, Florida. Based on the latest census, it has a population of about 2,926, primarily adults. The county has excellent infrastructure, including good roads, hospitals, shopping centers, restaurants, and schools, making it an ideal place to settle down – the city has 16 public schools rated 'good' or higher.
Madison's real estate market has been performing reasonably well over the recent past, and future projections are equally optimistic. Some of the most notable statistics include the following:
- Median listing home price - $159,900
- Median listing home price per square foot - $121
- The median price for sold homes - $180,500
- Median household income - $27,486
Average rental prices range from hundreds to thousands of dollars, depending on factors such as the property's size, design, precise location (neighborhood), and the number of bedrooms – average rental prices for apartments in or near Madison increased by about 9.5% in August 2022. Overall, the market has been on an upward trend for the past five years, and it performed especially well around March and June 2022.
Pinetta is the second-largest city in Madison County, with a population of about 1,414 people, according to a 2020 census. Most residents are adults, and more than half of the population is employed in white and blue-collar jobs. The city also has good public and private infrastructure, including four public schools and two private and charter schools.
Pinetta's real estate market has been on an upward trend over the past five years, albeit its performance has been more moderate compared to the other cities in Madison County and the rest of the state. Some of the most notable real estate statistics include:
- Median listing home price - $169,900
- Median listing home price per square foot - $110
- The median price for sold homes - NA
- Median household income - $39,125
It is worth noting that households in Pinetta earn approximately $10,000 more than those in Madison and Greenville – they also earn approximately $2,000 more than those in Lee. Overall, potential homebuyers in this city have relatively good purchasing power, making it an ideal place to invest in real estate.
Greenville is the third-largest city in Madison County, Florida. It has a population of about 1,358 people, according to a 2020 census. The city has four good or higher public schools and at least two private charter schools. It also boasts good infrastructure, including shopping centers, restaurants, hospitals, roads, and other public utilities. Overall, it is a habitable city ideal for setting down, guaranteeing a steady flow of homebuyers or renters.
Greenville's real estate market has been performing just as well as the state's overall market. Some of the most notable statistics include the following:
- Median listing home price - $295,000
- Median listing home price per square foot - $133
- Median price for sold homes - NA
- Median household income - $27,500
Rental prices in Greenville vary considerably depending on factors such as property type and size – the average rent for a three-bedroom apartment is about $1,000, albeit prices may vary from as low as $300 to more than $2,000.
Overall, the real estate market has been on an upward trend for the past five years – the trend has been consistent since April 2022. However, it is worth noting that Greenville's real estate market is currently a buyers' market (property supply currently exceeds demand).
Lee is the smallest city in Florida based on population – it has a population of about 573 based on a 2020 census. Nevertheless, the city has the quality infrastructure, including necessities such as hospitals, shopping centers, restaurants, roads, parks, and other public utilities. It has four public schools rated good and above and two private and charter schools.
Interestingly, despite its small size, Lee is home to some of the most expensive neighborhoods in Madison County. Overall, the city's real estate market has been performing relatively well – notable statistics include the following:
- Median listing home price - $313,900
- Median listing home price per square foot - $151
- Median price for sold homes - NA
- Median household income - $37,093
It is worth noting that about half of the city's residents are employed, and households in Lee earn approximately $10,000 more than households in Madison and Greenville. The city's real estate market's performance has been somewhat mixed over the past five years, but it is currently stable and shows signs of trending upwards.
Are You Sold on a DSCR Loan? Start Growing Your Real Estate Investments Today!
Does a DSCR loan sound ideal for you? Qualifying for one is easy, and you can use the money to grow your real estate investment portfolio in Madison County, Florida.
Remember to find a reliable lender with flexible requirements for a smooth application, evaluation, and approval process. You probably already know this, but it is also essential to do your due diligence before investing in real estate in Madison County, Florida.