(Mar 31, 2023)
Read on to understand how a DSCR loan works and what you need to qualify for the loan in Sarasota County, Florida.
Understanding DSCR
Debt Service Coverage Ratio (DSCR) is a unique financial figure that lenders calculate to determine if you qualify for a DSCR mortgage.
Lenders usually express the ratio in decimals such as 1.40 or 1.40x.
Essentially, the ratio determines if your investment cash flow is sufficient to cover the loan debt at the minimum threshold.
A DSCR ratio exceeding 1.0 implies a positive cash flow capable of funding the loan obligation. A higher percentage further increases your chances of qualifying because the property will likely generate more money to pay the loan and still retain some savings.
On the other hand, a ratio below 1.0 means your debt obligation is more significant than your cash flow. Lenders consider it a red flag since it implies a cash flow deficit that won't enable you to repay the mortgage as expected.
Why Get a DSCR Loan in Sarasota County, Florida?
Sarasota County is an ideal place for real estate investment with an assurance of generating consistent passive income. Moreover, it boasts a favorable climate, recreational activities, prestigious institutions, and affordable housing, triggering a constant demand for rental property.
Here are the best reasons you should get a DSCR loan in Sarasota:
Pristine Sandy Beaches
Sarasota features a 35-mile beachfront with islands and award-winning beaches such as Longboat Key , Lido Key , Siesta Key , and Venice Beach . Thousands of visitors from all over the world flood the sandy beaches every year for recreation.
The beaches present an incredible investment opportunity since most vacationers prefer staying in the nearby apartments during their tours.
High Ranking Institutions
Sarasota is a top-ranking School District with outstanding institutions, including Sarasota Middle School , Pine View High School , Bay Haven Elementary School , and the University of South Florida Sarasota , among others.
Owing to their sterling performance, the schools attract many students who always look for affordable housing while studying.
Cheaper Real Estate
Sarasota is a preferred destination for real estate investment thanks to its favorably low real estate prices. In addition, mortgage rates and property taxes are lower compared to other cities.
Projected Population Growth
Sarasota County is in Florida, where the population projection is on a higher trend. Experts project the population to increase consistently by about 7.8% over the future years.
According to USA Facts, Sarasota County's population had an annual increment of 1.5% between 2010 and 2021 and 2.6% between 2020 and 2021. Considering the projected positive growth, the population will continue growing even in the future decades.
An increase in the general population is good news to a property investor since the housing demand will equally increase.
Beautiful Climate
Sarasota is in Florida, which is popularly known as the sunshine state.
On average, the county enjoys a year-round sunny climate, with warmer temperatures even in the winter. For this reason, many seniors who can't build residential homes always rush to grab the available rental houses.
How Does a DSCR Loan Work in Sarasota County, Florida?
A DSCR Loan is generally suitable for a property investor looking for funding but can't qualify for a conventional mortgage. Unlike other loans that require you to prove your financial ability, the loan brings relief by focusing on your investment potential to qualify.
Provided you have an investment property that generates substantial income to cover your loan repayment; you can qualify for the DSCR financing without filing tax returns, pay stubs, or W2 forms.
In addition, if you're self-employed or have been out of formal employment for some time, you can still qualify for the loan since the lender doesn't require employment verification.
Thus, the bottom line has an investment income that exceeds the required monthly loan obligation.
How Is DSCR Calculated?
Different lenders may have different ways of calculating DSCR. However, they'll always base their calculation on your property's net income compared to the loan debt.
The general rule is to divide your property income by the total mortgage debt.
For example, let's say you want a DSCR loan based on existing property investment. Assuming the property generates an income worth $40,000 and the loan obligation is $32,000, your debt service ratio will be $40,000 divided by $32,000.
As a result, you'll have a DSCR of 1.25, implying the property generates 25% more income than you need to pay the loan.
How To Determine DSCR Income
Calculating your net income is easy, provided you can account for all your property investments.
If you own residential houses, add the monthly rental income to determine your DSCR income.
On the other hand, if you own commercial outlets such as office spaces, you can calculate your net operating income over 12 months. Here, you should determine the total rent and subtract major operational expenses like utilities, repairs, and maintenance costs.
How To Determine DSCR Payment
The DSCR payment refers to the outstanding loan debt you should pay the lender after borrowing the mortgage. Typically, the payment includes the principal, mortgage taxes, interest, mortgage insurance, homeowner's association fees, and other costs.
The type of property you wish to acquire dramatically determines the amount of DSCR payment you'll make. In Sarasota, Condos are standard investment options, but they usually attract high homeowners' association (HOA) fees. Thus, to lower your DSCR payment, you may opt to invest in a single-family property that requires no home ownership dues.
See below - how HOA fees can affect your overall DSCR:
Property Type - Condo
- DSCR Income - $1,800
- Principal - $1,100
- HOA Fees - $400
- DSCR - 1.20
Property Type - Single Family Property
- DSCR Income - $1,800
- Principal - $1,400
- HOA Fees - $0
- DSCR - 1.29
Another way to lower your DSCR Payment is adjusting your current tenancy rates to match the market rates. You can use a rent estimate from an approved appraiser to project your expected tenancy rate on the property. The benefit of adjusting your tenancy rates is that it gives your lender a higher figure to use when calculating your operating income.
What Is the Minimum DSCR To Qualify in Sarasota County, Florida?
DSCR requirements may vary depending on your lender. While some lenders may have a minimum threshold, others may require a higher ratio, and others may allow further negotiation.
The key to increasing your chances of approval is having a higher DSCR, especially if you're a first-time investor. A larger down payment and considerable experience in property investment can also help you negotiate for loan approval.
In Sarasota, lenders generally adopt Florida's minimum DSCR requirement of 1.25. Thus, your investment property should generate 25% more income than you need for loan payments in Sarasota.
General Guidelines for DSCR Loans in Sarasota, Florida
It is easier to qualify for a DSCR mortgage than a traditional mortgage. For this reason, a DSCR loan is one of the few flexible options for building a real estate portfolio.
That doesn't mean any real estate investor can qualify for the loan since lenders have additional qualification requirements.
What are the fundamental guidelines for DSCR mortgages?
Property Requirements
DSCR mortgages only finance investment property and not residential homes. Thus, you can't use the loan to buy a retirement home or a multi-unit family dwelling.
Residential rental houses may have between 1 and 4 units, while commercial buildings may have five or more functional units.
Most lenders accept various types of property, including;
- Office outlets
- Commercial hubs
- Single or multi-unit rental property
- Condos
- Townhomes
- Apartment buildings
- Hotels, resorts, and restaurants
It is advisable to conduct a background check so you're sure your preferred lender can finance the type of property you wish to acquire.
Loan To Value (LTV) Ratio
Lenders use your LTV ratio to determine the risk they'll incur based on your loan amount and the down payment. To calculate your LTV ratio, lenders will divide the loan amount by the property's appraised value.
A higher LTV ratio means the lender bears a greater risk for your loan. As a result, the lender will charge higher interest and require you to purchase private mortgage insurance to cover the risk. In addition, you'll likely pay a higher down payment for the loan.
In Sarasota, lenders require an LTV ratio of 75-80%, translating to a 20-25% down payment. However, if you're refinancing your current DSCR mortgage, you may need 20-25% of equity on the property.
DTI Ratio
The Debt to Income ratio represents the monthly income that settles debt payments, including loan obligations. Although conventional mortgages have a stringent DTI policy, DSCR mortgages offer massive reliefs, thanks to eliminating the DTI requirements.
Maximum Loan Limit
Most borrowers usually apply for loan financing within the $1-$2 million range. However, depending on your lender, you can qualify for up to $5,000,000.
Credit Score
A credit score is a unique three-digit number that lenders calculate from your credit report. The score usually highlights your history of debt repayment, including loans, utilities, mortgages, and credit cards. Most lenders can determine your reliability in paying a mortgage based on your credit score.
Credit scores range from 300 to 850, with a good rating starting from 670. However, most mortgage lenders have scores within the 600-50 range.
A credit score of 620-640 will guarantee you a DSCR loan, depending on the lender's arrangement.
Interest Rate Type
A DSCR mortgage may have a 30-year fixed or 5-year variable rate. Other lenders may also accept an interest-only adjustable rate where you only pay monthly interest on your mortgage balance.
The duration of the interest payment may range from a few months to years, depending on your agreement. However, your loan repayments may increase substantially when the period ends since the lender still expects you to clear the remaining balance within the required time frame.
Penalty for Prepayment
DSCR loans generally have flexible borrowing and payment terms for all lenders. However, like other loans, they come with hefty penalties for early payment or loan refinancing.
The easiest way to avoid hefty fines is to stick to the minimum stipulated time before refinancing your mortgage.
The Five Best Places To Invest in Sarasota County, Florida
Sarasota is a small county in Southwestern Florida along the Gulf Coast. According to the 2020 population census, the county had an estimated population of 434,006.
The county has three major cities: Sarasota, Venice, and North Port. Other notable towns within the county include Siesta Key, Lakewood Ranch, Englewood, and Nokomis.
The county has many tourist attractions, including botanical gardens, beaches, outdoor parks, museums, and wildlife parks. As a result, it is a popular destination for visitors and residents and an ideal spot for residential investment.
Moreover, real estate is a thriving venture in Sarasota, thanks to a strong seller market and an ever-increasing demand for rental housing. Thus, if you're looking for a place to launch your real estate investment, look no further than Sarasota County.
Below are the top cities for real estate investment in the county:
Lakewood Ranch
Lakewood Ranch is a planned suburban dwelling spanning a whopping 17,500 acres. It features many open spaces and recreational facilities that many urban dwellers want.
The town has seven distinct village-like segments with walkways, biking trails, dining, and retail outlets. However, an outstanding feature of the Lakewood ranch is a booming eco-friendly culture, courtesy of the Green Building Environmental standard adopted in 2005.
The selling price for a home in Lakewood is $$380,000, while the median cost of renting is $$2,155.
Siesta Key
Siesta Key is a top beach destination in Sarasota hence an ideal place to set up real estate investments. The population is much denser at the central portion of the beach, where bars and restaurants dominate.
A beach is also a dwelling place for marine and aquatic life, including turtles, sea foods, and dolphins. As a result, it is always a beehive of activities with a consistent flow of visitors looking for short vacation houses.
Although most residents are homeowners, the Siesta Key is still an ideal investment spot, thanks to relatively lower rent prices. The median rent in Siesta Key is about $1,417.
Laurel Park
Laurel Park is an ancient dwelling in downtown Sarasota. The town rose to fame owing to its elevation and designation as a historic district in 2008. Since then, it's been a popular destination for vacationers seeking to learn about Sarasota's rich cultural heritage.
Laurel features inspiring architecture with apartments and bungalows borrowing heavily from ancient building styles. Common themes include missionary, colonial, and revival styles, all adding to the town's aesthetic appeal. It is mainly a preferred investment hub for culture-savvy property developers.
And what's more, its proximity to downtown Sarasota means your tenants will find every amenity within reach.
According to expert realtors, the median price for property in Laurel is $694,500.
Indian Beach Sapphire Shore
The Indian Beach Sapphire is an ideal investment place for all good reasons. First, its proximity to Sarasota Bay attracts thousands of dwellers who yearn for a lovely beachfront view. Therefore, as an investor, you're sure of a constant flow of clients for your residential or commercial outlets.
Second, the Indian Beach Sapphire is home to institutions of higher learning, including the New College of Florida and the Ringling College of Art and Design . Building some rental homes within the neighborhood will be lucrative since most college students want accommodation.
The median price for property in Indian Beach is $315,000, slightly lower than the neighborhoods.
Gillespie Park
Gillespie Park is a relatively new neighborhood with lower home prices and rental rates. The median list price for a property in Gillespie is $397,500.
Besides affordable housing, Gillespie is a preferred residential and investment destination because of numerous eco-friendly walkways, recreational parks, and children's playgrounds, among other amenities.
Final Thoughts - Is DSCR Loan a Good Option?
If you're looking for affordable financing to boost your real estate venture but can't qualify for a conventional mortgage, a DSCR loan could be your perfect match.
The best thing about the mortgage is that it emphasizes your property income instead of personal earnings. Thus, it eliminates the need for income verification, favorable DTI, and other stringent requirements that lenders impose.
Contact an approved lender in Sarasota County, Florida to get started with your application.
(Mar 31, 2023)
