As you look for financing to grow your real estate portfolio, you'll probably come across the concept of debt service coverage ratio (DSCR).
DSCR refers to the ratio of available operating income to debt servicing for lease payments, principal, and interest. It is a crucial benchmark for measuring your financial ability to generate sufficient cash to pay off debts.
You can turn to a DSCR loan as the perfect non-qualified mortgage loan to build your real estate portfolio. With this type of loan, you get to qualify for financing based on the cash flow your investment property is projected to generate. Here's how to start DSCR loans in Santa Rosa County, Florida.
Why Get a DSCR Loan in Santa Rosa County, Florida?
As a non-QM loan designed for real estate investors, a debt service coverage ratio loan lets you qualify without verifying income. It is an excellent alternative to a conventional loan since the lender will require you to write off expenses on your investment property.
With this financing, you enjoy relatively fast closing times and loan limits of up to $5 million. There's no limit on the number of investment properties, and you also get unlimited cash-out. Other benefits of a DSCR loan include 20 percent down payments, an interest-only financing option, a minimum credit score required, and flexibility for both seasoned and new real estate investors.
Santa Rosa County, Florida, is gradually growing to accommodate the influx of young professionals living in the nearby cities and towns. Its unemployment rate is lower than the national rate, while the real estate sector is projected to grow and accommodate more investors. Getting a DSCR loan to invest in real estate in this county is, therefore, a good idea.
With support from Santa Rosa Economic Development, investors and business people across different fields realize their dreams in their county. The agency seeks to match the best workers, infrastructure, incentives, and sites with businesses and investment opportunities. It also enacts regulations for businesses for long-term profitability and growth.
How Does a DSCR Loan Work?
The debt service coverage ratio lets the lender know how to assess your ability to pay off a DSCR mortgage. It is one of the metrics lenders use to predict how your real estate investment can rent to estimate its rental value.
It will be difficult for a lender to give your financing on a property with a DSCR of less than 1. However, if you qualify for one, it will come in the form of a purchase loan with remodeling, upgrades, or home improvements to be made mainly to increase the property's rental value. So, if you have a debt service coverage ratio below 1.0, your investment property is projected to have negative cash flow.
When applying for a conventional mortgage, the lender will look at your debt-to-income ratio to assess the money you can afford as monthly loan payments. DTI is usually a percentage of your total monthly income dedicated toward debt.
Your eligibility will be based on your debt service coverage ratio. For DSCR loans, lenders consider the projected monthly rent the investment property will generate instead of your debt-to-income ratio. In this case, if the estimated income is sufficient enough to allow you to make monthly loan payments, you may qualify for the loan.
Does the DSCR Change all the Time?
Since the DSCR is a ratio used to measure your ability to meet debt obligations, it is likely to change depending on various reasons. For instance, you may agree to new debt obligations that lower the ratio. You may also make more profits on your investment property, resulting in a high cash flow and increasing the DSCR.
The DSCR may change to reflect changes in mortgage interest rates. A sudden drop in the interest rates will lower the interest paid on the debt, decreasing the DSCR. On the other hand, a sudden rise in the interest rates will increase the interest paid on the debt, increasing the DSCR.
How is DSCR Calculated?
The basis for calculating DSCR lies in the total debt service and net operating income. Your total debt service encompasses periodic loan payments that include lease buyouts, sinking funds, interest, and principal. Consequently, net operating income is the income generated by the investment property after deducting the operating expenses before amortization, taxes, depreciation, and interest.
You can calculate your DSCR by dividing the net operating income (NOI) by the total debt service. All figures used to calculate this ratio need to be fact-checked to ensure that the result is accurate.
DSCR calculations can give you a general overview of your ability to afford a property loan since it weighs your net operating income over your debt obligations. To get your gross rental income, the lender will factor in your annual rental income derived from the appraiser's comparable rent schedule and your lease agreement. The appraiser's rent schedule won't be necessary if you can give proof of a 12-month rental income history during the loan application.
How to Determine DSCR Income
Your net operating income is crucial when a lender is considering your DSCR loan application. It helps them analyze the profitability of your property investment. The income encompasses all revenue generated from the investment property after deducting all reasonably necessary operating expenses.
The net operating income appears on a property's income and cash flow statement, excluding capital expenditures, amortization, depreciation, and interest and principal payments on a loan. It is usually known as earnings before interest and taxes when applied outside real estate.
Besides rental income, your investment property can generate revenue from amenities or utilities, including vending machines, laundry facilities, and parking structures. The operating expenses will encompass running and maintenance costs such as repair costs, janitorial fees, property taxes, insurance premiums, and legal fees. Consequently, the capital expenditures will include costs for installing a new appliance or utility system in the building.
All in all, real estate investors rely on the NOI to determine the capitalization rate, which is crucial when calculating the value of the investment property. You can compare investment properties you want to buy or sell.
How to Determine DSCR Payment
Since lenders calculate debt service coverage on an annualized basis, they look at the cash flow of the property in a certain period over the debt obligations within the same period. This is the opposite of liquidity and leverage, which reflect your financial health at any time.
So, in all adjustment scenarios, lenders consider a higher debt service coverage ratio better than a lower one. In this case, having a DSCR less than 1:1 or 1x will reduce your chances of getting a DSCR loan. This is because a 1x DSCR suggests you owe more money to creditors than you generate in a year.
What is the Minimum DSCR to Qualify in Santa Rosa County, Florida?
The rental revenue of your investment property has to surpass or meet the lender's coverage ratio criteria to improve your chances of qualifying for a DSCR loan. Though it varies with the borrower and lender, the coverage ratio is derived from dividing the monthly rental income by the mortgage payment. A standard coverage ratio is between 1.0x and 1.5x.
One good thing about getting a DSCR loan in Santa Rosa County is that the application process is quite streamlined and takes a shorter time than a traditional investment property loan. The eligibility criteria for the mortgage are also based on the property's projected rental income instead of your income.
You may consider signing up for the DSCR loan program if you want to refinance or buy an investment property, notwithstanding your income. Getting the loan will also be a good idea if you don't want to share your personal financial, tax, or employment information.
Applying for a DSCR Loan in Santa Rosa County, Florida
The first step to applying for a DSCR loan in Santa Rosa County, Florida, is contacting a reliable direct lender or enlisting the services of a mortgage broker.
The lender will require more information about the investment property, including the estimated rental income, number of units, square footage, and address. Other aspects of the loan application process include the following:
Financing
At this step, the lender will describe all loan characteristics, including the fees, period, and value. The lender will also calculate your DSCR during this stage to determine your eligibility.
Property Information
The lender will mandate you to complete all relevant loan paperwork to consider you for the mortgage. Note that any financial forms filled for the mortgage only require information regarding the rental or business property rather than your personal financial information. Lenders need to base the loan on your DSCR instead of your financial history.
Submission and Closing
Since DSCR mortgages don't require your personal financial history, they have a relatively faster application and closing process than other property loans.
So, once the lender approves you for the loan, they will issue you a loan estimate that encompasses the monthly payment, interest rate, and closing costs. They will then give you a pre-qualification or loan commitment letter after you review and accept the loan terms.
You have to pay an appraisal fee to the lender to get the investment property appraised. Expect to be taken through the loan underwriting procedure and asked to sign the final mortgage documents during closing after the appraisal is complete.
What the Appraisal Involves
DSCR mortgages don't rely on any physical collateral as leverage. In this case, the lender must know the property's actual value before underwriting the loan.
An appraisal helps establish the value of the DSCR loan by comparing it to others in the mortgage market. It also gives insights into the risks lenders face while giving out the loan and ensures that the loan is originated at a relatively fair price. So, a DSCR mortgage may attract substantially higher interest fees and rates if it does not undergo an appraisal.
Borrower Qualifications for a DSCR Loan in Santa Rosa County, Florida
Like other property mortgages, DSCR loans have specific qualifications you need to meet as a borrower. These qualifications factor in your credit score, coverage ratio, and ability to pay the program costs and fees, as discussed below.
Coverage Ratio Requirement
DSCR loan lenders don't consider your debt-to-income ratio to assess eligibility. Instead, they consider your coverage ratio, which reflects your ability to pay off debts based on your net operating income.
Even more, less paperwork is required in the loan application since the lender won't check your income or employment history.
Credit Score Requirement
DSCR lenders require a minimum credit score of 640 to improve your chances of getting approved for the mortgage.
This credit score varies with the lender and your unique borrowing circumstances. It is also possible for you to qualify for the mortgage as a foreign investor without having to establish credit.
DSCR Program Costs and Fees
Expect your DSCR mortgage to have relatively higher fees than a traditional property loan. These fees may encompass mortgage points, prepayment penalties, and origination fees. Also, the total loan costs are pretty high due to the 80 percent maximum LTV ratio on the loan.
DSCR lenders charge an origination fee ranging from 0.5 percent to 1.0 percent. Even more, the appraisal fee is within the range of $300 to $500. The fee may be lowered or waived depending on the lender.
Expect to pay an interest rate that's 1 or 2 percent higher than the rates on a traditional property loan. The key to getting the best rates on a DSCR mortgage is shopping around and comparing loan estimates from different lenders.
Closing expenses may include escrow, title, appraisal, or origination fees. They vary with the state where your investment property is situated.
The Best Cities to Invest in Santa Rosa County, Florida
Situated in the northwestern part of Florida, Santa Rosa County is a fast-growing tourist destination due to its protected wilderness areas and beach access. The county has recorded unprecedented population growth, increasing the demand in the real estate sector.
So, if you want to invest in real estate in Santa Rosa County, Florida, here are cities and towns to consider.
Gulf Breeze
Gulf Breeze is a city situated in Santa Rosa County, Florida, with a population of 6,900. It is part of the larger Pensacola Metropolitan Area, boasting a sparse suburban feel with most residents being homeowners. The city mainly comprises young professionals and has many coffee shops, restaurants, and bars.
Gulf Breeze has a favorable employment sector with a median household income of $91,705 (higher than the national average of $64,994). Its cost of living, business and job growth prospects, and employment rates are also quite impressive.
Milton
As a sparse suburb in Santa Rosa County, Milton boasts a population of 10,259, with most residents renting their homes. This city also recorded unprecedented population growth in 2013 that positively affected its real estate market.
Milton also ranks among the best places to live in the Sunshine State based on its low cost of living. It boasts well-maintained infrastructure and utilities/amenities that are a magnet for residents.
Jay
Jay is a town with a suburban rural feel in Santa Rosa County, Florida. It boasts above-average employment rates, cost of living, and job and business growth prospects. With a slowly growing population of 520, Jay has the potential for growth in real estate.
The Bottom Line
DSCR mortgages are easier to qualify for since they don't require personal income verification and boast flexible underwriting guidelines.
You can use them to finance an investment property with no or little rental history. And their most important qualification criteria is the coverage ratio, which is based on the property's estimated rental income.
