DSCR is a primary measure of an investor’s ability to repay their loan, make dividend payments and take on new financing options. This loan is also considered one of the top three metrics that play a crucial role in measuring debt capacity alongside the debt-to-total assets ratio and the debt-to-equity ratio.
In this article, you will learn how to go about the no-doc way to build your real estate portfolio effortlessly and timelessly.
Why Should You Get a DSCR Loan in Pasco County, Florida?
DSCR loans in Pasco County, Florida, play an integral role in promoting a healthy and vibrant rental market. The loans enable investors to increase their influence on the existing real estate market in Pasco County.
So, if you are one of the investors looking to step foot on Pasco’s real estate, this is the time to do so through the DSCR loans. After all, you don’t need income verification to reap the great benefits of DSRC loans.
Pasco County, Florida, provides numerous perks to both new and established real estate investors. Some of these perks include:
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Lower unemployment rates than the US average.
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Reduced cost of living compared to other areas across the country.
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Excellent healthcare facilities and services.
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An expanding job market.
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Exemption of social security tax.
- Friendly, warm climatic conditions in most of the year.
Thanks to the advantage mentioned above, several new investors and residents are drawn to Pasco County, Florida. The influx of new residents in the country creates an ever-rising demand for rental properties, which is good business for real estate investors.
The DSCR loans across Florida, especially in Pasco County, often compare the investors’ property cash flow with the monthly payments. (Don’t confuse the cash flow with the investors’ income). This comparison helps streamline the process faster.
Not to mention making the entire process flexible and accommodating to self-employed borrowers, full-time investors, and any real estate investor with a complicated tax return.
How Does a DSCR Loan Work?
Most real estate investors in Pasco County will likely face difficulties trying to prove their financial ability and potential to repay a loan. Such challenges often arise due to the income verification process requirements of traditional loans.
On the contrary, DSCR loans in Pasco County, Florida, do not impose strict measures regarding income verification for borrowers. This is because DSCR loans provide a lending solution to investors.
Mainly, the lending solution is based solely on your investment property’s income rather than your income. In other words, if your current investment property generates enough income to take care of your loan repayment, then you could be eligible for the DSCR loan. With this loan, you will not need to prove your tax returns or pay stubs.
In the real sense, the DSCR loan is not all about your finances. It is actually about the potential of your real estate investment property to generate enough income to offset your loans.
However, your investment property’s income needs to be more than the payment amount to qualify for this loan.
How is DSCR calculated?
The DSCR loan compares your investment property’s income to monthly mortgage payments. Usually, the DSCR is represented in decimal form—something like 1.2 or 1.2x.
This figure means that a property bearing a DSCR of about 1.25x can generate around 25% more income than what is necessary to cover your monthly mortgage payments.
With that, a higher DSCR ratio is highly favored since your property is bringing in more cash than it takes to serve the loan.
On the other hand, a property with a lower DSCR, say 1.0, does not break even. It simply has a negative cash flow.
The formula to use when working out the DSCR - DSCR = Income / Payment
The formula for the DSCR requires the total debt servicing and net operating income. In this case, your net operating income describes your real estate investment’s generated revenue minus certain operating expenses or COE, excluding interest payments and taxes imposed on your property.
Net operating income can also be considered the equivalent of your total earnings before interest and tax (EBIT).
Something like - DSCR = Net Operating Income / Total Debt Service
Net Operating Income = Generated Revenue - Certain Operating Expenses (COE)
Total Debt Service = Current Debt Obligations
Quite several calculations may involve non-operating income in Earnings Before Interest & Tax (EBIT). In this sense, it is wise to apply consistent criteria when calculating DSCR. This advice applies to an investor or a lender comparing companies’ creditworthiness (or a manager comparing different quarters or years).
For the borrowers, it is essential to know that lenders may work out DSCR using slightly different approaches.
Based on these calculations, your total debt service is your current debt obligation. It may include any interest, sinking fund, principal, and lease payments due the following year. When presenting this information on the balance sheet, you should include the current portion of your long-term debt and short-term debt.
Sometimes your income taxes may complicate DSCR calculations. This is attributed to the fact that interest payments are often tax deductible, but principal repayments are not. So, the most accurate way to work out total debt service should be:
TDS = {Interest x (1-Tax Rate)} + Principal
Where - TDS is the Total Debt Service
Using Excel to Calculate DSCR
You can easily create a dynamic DSRC using Excel. So, how do you go about it, given that you cannot just run an equation dividing net operating income by your debt service?
You can achieve this feat by titling two successive cells. Preferably A2 and A3 for “net operating” and Debt service,” respectively. Once you have titled two cells, you should proceed to cells B2 and B3 to insert respective figures from your income statement.
Using a separate cell on the Excel sheet, enter the formula for the DSCR that works well with B2 and B3 cells instead of using actual numeric values.
How to Determine DSCR Income
The DSCR is usually based on the monthly rental income, especially for residential properties. The DSCR focuses mainly on net operating income (NOI) for commercial properties, which is also gross income minus operating expenses.
How to Determine DSCR Payment
When determining the DSCR payment, factor in the interest rate, principal amount, insurance cover, taxes, HOA, and other additional fees. All these costs are often abbreviated as PITIA.
Check out these examples on how to determine DSCR payment in Pasco County:
Example 1 - How higher rent can improve your DSCR
| Income | Payment | DSRC |
|---|---|---|
| $2800 | $2500 | 1.12 |
| $3200 | $2500 | 1.28 |
Example 2 - How lower payment can improve your DSCR
| Income | Payment | DSCR |
|---|---|---|
| $2500 | 2300 | 1.1 |
| $2500 | 2000 | 1.25 |
Pro Tip - Make sure to play with numbers when dealing with any property under your consideration. This will help you increase your income or reduce your payment. After all, a higher DSCR can see you get approved for the loan.
What is the Minimum DSCR to Qualify in Pasco County, Florida?
Individual lenders have their unique requirements when it comes to DSCR. The minimum requirement to qualify for the DSCR loans will depend on your lender of choice.
But the good news is that most lenders in Pasco County, Florida take the minimum DSCR of about 1.25x. Apart from that, some lenders may consider a lower DSCR than 1.25x. A few of these lenders may not require a minimum DSCR to offer you a loan.
However, some lenders will require a higher DSCR than usual. For that reason, make your DSCR higher than the set minimum to be sure of being considered for a loan. New investors take note of this advice as it will give you the best chance of DSCR approval.
DSCR loan guidelines for borrowers in Pasco County, Florida
If you compare DSCR loans to traditional mortgages, you will discover that the former are considerably easier to qualify for. This is the case despite variations in specific requirements set by different lenders.
Most DSCR lenders in Pasco County, Florida, use these qualifications:
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Loan-to-value (LTV) ratio - Typically, DSCR loans in Pasco County come with a maximum LTV of about 75% to 80% or a minimum down payment ranging from 20% to 25%.
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Credit score - Quite several DSCR loans across Pasco County, Florida, require borrowers to have a credit score of not less than 640. Some lenders may opt for lower scores than what is acceptable.
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Verifying your property’s future rental income - Your DSCR lender will have to verify that your real estate can generate enough income to repay the loan. In this regard, your appraiser will have to fill in some details in the Fannie Mae form-1007, especially for a Single-Family Comparable Rent Schedule.
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Loan purpose - You may be required to use DSCR loans to buy a new residential property. You may also use this loan to refinance your existing mortgage, whether standard or cash out.
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Property types allowed - You can use the DSCR loan to buy a single or multi-family residential property of up to four units, condominiums, condotels, apartment buildings, townhomes, and more. Confirm with your respective DSCR lender to determine if the property you are willing to purchase is allowed under the DSCR loans.
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Property use - Take advantage of the DSCR loans to buy both short-and long-term rentals. Remember that you cannot use the DSCR loans to buy primary residences in Pasco County or across the state of Florida.
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Loan type - There are two DSCR loan categories: the 30-year fixed rates, the five-year adjustable rates, and the interest-only ARMs. Ask your DSCR lender about the type of loan that suits your needs.
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The income and employment debt-to-income(DTI) ratio - Lenders in Pasco County, Florida, don’t require income, employment, or debt-to-income to determine your eligibility for the DSCR loans. They only need the mortgage payment amount and the property’s cash flow.
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Maximum loan amount - Maximum DSCR loan amounts in Pasco County may be as much as $5 million.
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Maximum property owned - There is no limitation to the number of properties or DSCR loans you can have.
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Property penalties - There are DSCR loan prepayment penalties if you pay off your loan late or refinance it too quickly.
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Cash reserves - Your lender may need proof of cash reserves of at least six months of your mortgage payments. Lower DSCR loans may require cash reserves totaling 12 months or one year.
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Closing in the name of LLC - Your lenders may let you close in the name of LLC.
- Seller-paid closing costs - Most lenders in Pasco County, Florida, allow property sellers to pay a fraction of closing costs.
The Five Best Cities to Invest in Pasco County, Florida
More people prefer settling in Pasco County and other parts of Florida thanks to the warm weather conditions and other factors that make their living here a preferred choice. Many residents moving to this county live in rental houses before saving enough money to purchase their homes. This presents an excellent opportunity for real estate investors.
Pasco County boasts several investment opportunities in various locations, including towns and cities. This is why median home prices in different locations within the county have increased exponentially and are expected to rise as more people from other parts of the country shift to the Sunshine State.
Below are the top five cities to invest in Pasco County, Florida:
Quail Ridge
Located in Pasco County, Quail Ridge is one of the top suburbs of Tampa for real estate investment. Settling in Quail Ridge exposes you to a sparse suburban feel in a peaceful neighborhood.
Plus, a large percentage of residents in this city own their homes. Both retirees and young professionals find Quail Ridge the ideal location to spend the rest of their lives.
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Median home value - $161,100 against the national $ 229,800
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Median rent - $1,201 against the national $1,096
- Median household income - $71,497 against the national $ 64,994
Trinity
Also a suburb of Tampa, Trinity is home to around 13,000 people. Living in this place gives you a rural feel away from the usual hustles and bustles of busy city life.
Public schools in this city are highly rated, so moving here with your school-going children should not be a problem anymore. Trinity is a perfect place for families, seniors, and young individuals looking to settle in Pasco County.
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Median home value - $293,000 against the national $229,800
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Median rent - $2,206 against the national $1,096
- Median household income - $82,557 against the national $ 64,994
Odessa
Odessa, in Pasco County, Florida, is a beautiful little area with about 8,000. It is considered one of the best places to invest in real estate due to its proximity to major cities in Florida.
Investing in Odessa will likely increase revenue because many families tend to settle here. Besides, most residents of this area own their homes, meaning that demand for residential properties is high.
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Median home value - $332,100 against the national $229,800
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Median rent - $1,237 against the national $ 1,096
- Median household income - $ 93,352 against the national $ 64,994
Land O’Lakes
Investing in Land O’Lakes is a gainful venture since different people from diverse backgrounds call this part of Pasco County home. Additionally, residents of this city are friendly and accommodating. The suburbs are clean, quiet, and safe all the time.
The area has countless parks, and its schools are highly rated academically. Land O’Lakes is an excellent choice for families, young professionals, and retirees to rent or buy homes here.
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Median home value - $249,100 against the national $229,800
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Median rent - $1,421 against the national $1,096
- Median household income - $79,940 against the national $ 64,994
Wesley Chapel
With a population of more than 60,000, Wesley Chapel in Tampa provides a rich platform for real estate investors. It is also one of the best cities to live in the State of Florida.
Residents enjoy a sparse yet tranquil suburban feel throughout. Most of them own their homes, so investing in residential property in this part of Pasco County is a wise idea.
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Median home value - $242,000 against the national $229,800
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Median rent - $ 1,537 against the national $1,096
- Median household income - $ 86,945
The Bottom Line
The DSCR loans act as a commonly used financial ratio for real estate investors in Pasco County, Florida. This particular ratio compares your operating income with your debt payments. Typically, the DSCR is used as an assessment tool to ascertain whether you will be in a position to use the income to fulfill its principal or interest obligations.
Lenders and external parties use the DSCR loan to implement operational requirements that help mitigate potential risks in loan terms for real estate developers in Pasco County and its neighborhood.
