(Mar 30, 2023)
In Union County, Florida, the real estate market is growing, and the number of residential and business developments has increased over the last decade. One of the factors accelerating real estate investments in Union County is the availability of quick and easy financing options such as DSCR loans. If you are new to DSCR financing, we have covered everything you need to know in the sections below.
What are DSCR Loans?
The debt-service coverage ratio, DSCR loans, is an investment property financing solution available to real estate investors. DSCR is a ratio commonly used to determine a company's financial performance, especially for those highly leveraged or carrying lots of debt. The ratio compares the company's debt obligation to its total operating income.
In the real estate world, DSCR compares the property's expenses (principal repayments, interest, insurance, taxes, and HOA fees) to the total rental income. If the DSCR is above a given number determined by the lender, you qualify for the loan; otherwise, you aren't eligible. Most lenders have varying minimum DSCR requirements and other qualifying metrics used to determine your eligibility.
How Do DSCR Loans Work
As noted above, DSCR lenders use the income-to-debt obligation ratio as the primary qualification requirement. Your lender's minimum DSCR will require often depends on the current macroeconomic conditions. In a growing economy, most lenders may have lower ratios.
Typically, a DSCR greater than 1.0 shows that the property generates more income than the money it spends to cover debt obligations. On the other hand, a DSCR of less than one shows that the debt or expenses are more than the total income; hence the property isn't a good investment.
The higher the DSCR, the more valuable the investment, and the higher the chances that any lender will want to finance it. Most lenders in Union County, Florida, require borrowers to have a minimum DSCR of 1.25. By extrapolation, this means the property should generate 25% more income than its debt obligations.
Once you have identified a great real estate investment opportunity, approach your local lender to determine your DSCR and whether you meet the other loan eligibility requirements. It's worth noting that DSCR lenders only focus on the property's cash flow, with little to no reference to your income or employment status. If you do not have a steady job or income, you can still qualify for the loan, provided the property you want to invest in is financially viable.
DSCR Loans Eligibility Requirements in Union County, Florida
Before you qualify for a DSCR loan, your lender will expect you to meet some requirements. The requirements may vary from one lender to another, but most will remain consistent. Below is an overview of the eligibility criteria used by DSCR lenders in Union County, Florida.
Coverage Ratio
From the definition of a DSCR loan, coverage ratio is one of the essential qualifications you should meet. The coverage ratio shows the ability of the investment property to produce enough income to repay the loan.
The minimum ratio will vary with different lenders or may change with your situation. For instance, if your coverage ratio exceeds the set minimum, you will have to pay more down payment or include your income during loan verification.
Credit Score
Because you do not have to verify personal income, most DSCR lenders will have a higher credit score requirement. Many lenders in Union County will require borrowers to have a FICO/credit score of at least 640.
However, that does not mean an automatic disqualification if your FICO score does not meet the set minimum; you can still qualify with a higher interest rate. You should always find a lender with terms favorable to your unique needs.
Loan-to-Value (LTV) ratio
LTV ratio represents the proportion of the loan amount against the appraised value of the investment property you are buying. LTV shows how much equity the borrower has in the property.
Like in many other parts of Florida, lenders in Union County require a minimum of 20% down payment, which translates to a maximum LTV of 80%. If you have a lower LTV, you will enjoy lower interest rates or reduced monthly payments.
Loan Purpose
DSCR loans are only designed for investment properties since lenders focus on the income from the property. The loan can buy, refinance, construct, and rehabilitate investment properties.
Such properties could be condos, vacation or short-term rentals, family residences, two or more-unit apartments, office buildings, and townhomes. Talk with your lender to find out the type of properties they finance.
Cash Reserves
Lenders need confirmation that you can make payments for the loan. That means you should have extra money before closing the loan.
Many lenders will require that you have a cash reserve equivalent to six to twelve months' worth of payment. With a high DSCR, you may need only six months of cash reserve.
Type of Loan
Like any other mortgage, DSCR loans come in various types. The loan types can be Adjustable Rate Mortgages (ARMs), interest-only, or fixed-rate loans. The terms could stretch from five to 30 years, depending on your lender's terms. Find a lender that offers a loan type ideal for your case.
Other factors you should look out for when applying for the DSCR loan program include the loan amount, prepayment penalty clause, and closing costs.
How to Calculate DSCR
When calculating DSCR, your lender will divide your Net Operating Income (NOI) with the Total Debt Service or (TDS). NOI refers to the property's total revenue minus the operating expenses, excluding taxes and interest payments. On the other hand, TDS is the current debt obligations, including the principal payments, interest, sinking funds, and operating expenses.
Even so, income taxes often complicate DSCR calculations. This is because interest payments are tax-deductible, while principal repayments are not. In light of this, some lenders have adopted more complex ways of calculating DSCR. Before choosing a lender, ensure you understand how they calculate DSCR and what that means to your loan eligibility.
How to Determine DSCR Income
Your DSCR income is the net operating income from the real estate property or properties you are invested in. The DSCR income is a pre-tax figure on the property's income statement. It excludes the principal and interest payments, depreciation, amortization, and capital expenditures.
An easy way to calculate the DSCR is to subtract the property's operating expenses from its revenue. This revenue may include rental income, parking fees, service charges, and income from businesses you own within the premises. On the other hand, expenses may include property taxes, insurance premiums, utility bills, and maintenance, repair, and management fees.
How to Determine DSCR Payment
DSCR payment is the amount you pay monthly towards your investment. This includes principal and interest on the loan, insurance, taxes, and homeowner's association fees.
As an investor, you want to find ways to lower the DSCR payment, so you'll have manageable debt obligations throughout the loan term. Every lender has their formula for calculating the DSCR payment. Hence the best way to figure out how much you'll pay is to consult your loan officer.
One of the easy ways to achieve this goal is to put more money down, ensuring you incur a slightly lower interest rate. Additionally, you can increase the rental income while lowering the property's operating expenses.
Minimum DSCR in Union County, Florida
Most DSCR lenders in Union County, Florida, have a minimum coverage ratio of 1.25. But as noted earlier, the figures may change from time to time depending on macroeconomic trends. Some lenders may also set a lower DSCR but compensate for the risk with a slightly higher interest rate.
Ultimately, others may have a higher DSCR requirement. Always consult your DSCR lender to know their minimum DSCR before making up your mind. You should also consider other factors, such as interest rates and the DSCR payment, to ensure you get a good deal.
Why Go for a DSCR Loan in Union County, Florida?
Florida is among the best states for real estate investors seeking to expand their portfolios. Its lucrative ROI properties make investing in Florida a rewarding experience.
In addition, Union County offers the best outdoor recreational activities, which elevates the need for investment properties such as holiday homes or vacation rental homes.
Here are other reasons why you should go for a DSCR loan in Union County:
No Income Verification is Needed
This is the primary reason most borrowers will opt for a DSCR loan. Since no income verification is needed, tax returns, bank statements, or W-2 forms are not needed in the loan program.
Instead, lenders are concerned about the revenue generated by the investment property. This makes it ideal for self-employed borrowers or those wishing to invest in many properties at once.
Quick Closing Times
DSCR loans eliminate the process of verifying your employment status, bank statements, and paychecks. This results in faster closing than conventional mortgages, which usually last several weeks.
Faster closing leads to fast financing, meaning you have a better chance of securing the property if there are several bidders.
Unlimited Number of Properties
Most mortgage lenders will require you to invest in one property at a time. This is not the case for DSCR loans. You can commit to more than one investment property at a time.
With such an option, you can enjoy the benefits of multiple investments in real estate. In addition, you will grow your portfolio quite fast.
Ideal for all kinds of Real Estate Investors
A DSCR loan is an excellent option for anyone investing in real estate. It can be a great stepping stone for newbies and great for seasoned investors who need more funds to expand their business.
The loan program is also ideal for retired or self-employed investors who find it hard to qualify for traditional loans.
Unlimited Cash-out
Uncapped cash out is one of the best benefits of a DSCR loan. DSCR loans allow you to take out as much cash as you need, making it ideal for borrowers who may unexpectedly need to cover significant expenses. This is usually not the case with other lenders since they will have limited cash-out.
The Best Real Estate Markets in Union County, Florida
Union County is located in the north-central region of Florida and is the smallest county in the entire state. According to the 2020 U.S. census, the population was 16,145, with a personal per capita income of slightly above $21,000 but with an actively growing real estate market.
Over the years, the county has seen an influx of new homeowners and real estate investors. Here are some of the promising real-estate markets you should consider.
Lake Butler
Lake Butler is the only city in Union County that also serves as the county seat. The median household income in the city was $25,350, per the 2020 census, while the typical home value in 2022 is $239,100, a 23.5% rise over the past year.
Similarly, the average apartment rent is $2400, and the area enjoys a well-connected transport system among other basic amenities such as state parks, healthcare facilities, shopping centers, etc.
Most residents in Lake Butler are working-class families with school-going children and retirees who enjoy serene and peaceful suburban living.
Worthington Springs
Worthington Springs is a famous town in Union County, situated along the renowned Santa Fe River. The town is known for its mineral spring (believed to have medicinal benefits) located on the Santa Fe River, which attracted people from far and wide in the early 1900s. In 2020, the town's population was approximately 400, and the median household income was $25,625.
Worthington Springs offers a thriving real estate market, thanks to the town's serene and rural setting, ideal for young families and retirees. Apart from the legendary spring, the town offers other unique experiences, from expansive trail networks and parks to modern restaurants and shopping villages.
Raiford
Raiford is a town in Union County that boasts a promising real estate market. As of the 2020 census, it was estimated that Raiford had a population of 225. Most of the young families living in Raiford are people working in any of the three correctional institutions in the area.
The other residents are retirees who love the warm tropical climate, low cost of living, and the serene nature of Raiford's neighborhood. As a small town with incredible scenery and expansive tracks of land, this area is ideal for homeowners who love upcountry living.
Bottom Line
As an investor looking to build or expand your real estate portfolio, Union County, Florida, offers an opportunity to actualize your dream. Whether you want to venture into commercial or residential real estate, you'll have several markets.
But first, you need to secure the right financing from a reliable lender. Before starting, talk with a local lender to check your DSCR and other eligibility requirements.
(Mar 30, 2023)
