The South Florida housing market is red hot, which can make buying in a major metro areas like Miami-Dade County a challenge for many investors. Things can be even tougher if your employment circumstances aren’t traditional or you don’t have tax returns available.
If you’re hoping to secure a mortgage on a residence or investment property, but your main cash flow comes from sources other than traditional full-time employment, a no-income DSCR loan may be a good option. No Income Verification (DSCR) Loans are “non-qm” loans, meaning they are “non-qualified mortgages.”
Today, let’s break down what a DSCR loan program is, what No-DSCR programs are, and if it’s suitable for your mortgage needs in Florida.
What Is the Debt Service Coverage Ratio (DSCR)?
The debt service coverage ratio, or DSCR, is a measurement of a person or firm's current cash flow they can use to pay for their debt obligations. In simpler terms, it is how much money that individual or entity has coming in to pay for new and/or current loans.
Lenders use the ability of the asset/property to produce income monthly (such as lease agreements and rental market value), which should be enough to cover the expenses of the loan (principal + interest) and the obligations as Insurance and taxes.
When the property is not going to be rented as, for example, a primary home, or when the property can’t cover the expenses with the rental market value, we have to use a No-DSCR program. Using a No-DSCR program means the property could produce income, but we are not counting on it to qualify for the loan. Rates are higher because this practice represents a higher risk for the lender. So, on No-DSCR programs, no income is required of any type from the guarantor or the subject property.
How Do DSCR Loans Work?
In short, DSCR loans work by analyzing the ability of a property to produce income to cover the expenses.
It could be documented for the lender with a lease agreement in cases of refinancing or with a supplement to the appraisal called "Rent Schedule," where they perform a market analysis to determine how much that property could be rented once the buyer can use the property.
Real estate investors, companies, and other groups sometimes use no-income DSCR loans because they write off expenses for their properties and therefore may not qualify for conventional mortgage loans.
However, the debt service coverage ratio lets individuals’ assets still qualify for no-income DSCR loans by proving that they have the cash flow necessary to pay back their debts. They don’t use proof of income like tax returns or pay stubs, which are traditionally required for most mortgage loans.
How Are DSCR Loans Calculated?
DSCR loans are calculated by finding a few key metrics and analyzing them through a formula. The formula to calculate DSCR is as follows:
DSCR = Net operating income / total debt service
Net Operating Income (NOI)
The first metric is net operating income, or NOI. The net operating income is how much money you bring in after accounting for certain operating expenses. You can calculate the NOI by using this formula:
NOI = revenue – COE or certain operating expenses
Note that you won’t include interest payments or taxes when calculating your COE. Your operating expenses will include things like the cost of labor and repairs, though.
Total Debt Service
The second half of the DSCR formula is the total debt service. This just refers to the current debt obligations that a person or business has. It’s easily calculated by totaling up all debts and outstanding loan amounts.
Suppose the NOI for the property is rented for $120,000 per year, and the total debt service (in this case, the principal, the interest on the mortgage payment, plus the insurance and property taxes) is $100,000 per year.
In this case, the debt service coverage ratio (DSCR) would be $120,000 / $100,000, which equals 1.20. It’s also common to see an “x” after the ratio. This example could be shown as “1.20x”, indicating that NOI covers debt service 1.2 times.
What Is a Good DSCR Ratio?
What constitutes a “good” DSCR is highly contingent on a borrower’s industry, their competitors, the stage of growth they’re at, and a variety of other factors. For example, smaller companies that have a very limited amount of cash flow at the beginning may be approved with a lower DSCR than a larger company with a much more established revenue stream.
Generally, however, you want a DSCR ratio of above 1.25 if you want to qualify for a no-income DSCR loan in Florida.
A DSCR ratio of 1.0 means you have just enough cash to pay for your debt obligations (and, therefore, probably can't take on much more debt). A DSCR ratio of below 1.0 might indicate that you don’t have the cash necessary to pay off your debts.
Here’s an example of the DSCR formula in action:
You are a real estate developer, and you want a mortgage loan to purchase another investment property.
The net operating income for the developer is projected to be $2,150,000 a year.
The debt service will be $350,000 a year.
Plug those numbers into the formula and you get DSCR = $2,150,000/$350,000 = 6.14.
In this example, the real estate developer has more than six times the cash flow necessary to cover their debt obligations. Thus, they are more likely to be approved for a no-income DSCR loan.
How Do You Qualify for a DSCR Loan?
In order to qualify for a no-income DSCR loan, you (or your hypothetical rental property) have to have enough rental income that it exceeds the coverage ratio requirement.
In other words, you need to have good cash flow and as few debts as possible. The more money you have coming in, and the fewer debts taking away that money, the more confident a borrower will be in issuing you a no-income DSCR loan offer.
Advantages of DSCR Loans
There are lots of benefits to taking out a no-income DSCR loan, including:
Doesn’t require income or job history verification
No limit on the number of properties
Higher loan amounts
Interest-only loan options
Below, we’ll dive into each of these benefits in a bit more detail.
DSCR Loans Don’t Require Income or Job History Verification
Since no-income DSCR loans don't require tax returns or similar documents, they also don't require proof of income or job history verification. This can make them advantageous loan instruments for those who have just arrived from abroad or for individuals who have unique employment situations.
Instead of verifying income, lenders of no-income DSCR loans will usually ask the borrower to verify their liquid assets or alternative income sources.
No Limit on the Number of Properties
Furthermore, you can take out a no-income DSCR loan on as many properties as you like. Some traditional mortgages require you to have a limited number of properties — usually to minimize risk on the new borrower’s behalf.
With a DSCR loan, you can keep purchasing new properties as long as you have the cash flow and the DSCR to prove you can cover your debts.
Higher Loan Amounts
On top of that, no-income DSCR loans can be great options for Florida investors since they are often available for higher loan amounts. Some DSCR loans are available for up to $5 million, particularly when taken out with trusted lending experts like Vaster.
Interest-Only Loan Options
Other lenders may provide DSCR loans with interest-only terms. In other words, you may only have to pay the interest charges for the first several years of the loan’s term, making your first batch of payments cheaper than they would otherwise be.
However, these loans are only given to those who have proven cash flow streams that can handle the burden. Lenders must also be confident that you’ll be able to pay back the higher amounts when the interest-only period subsides.
No-Income DSCR Loans in Florida
No-income DSCR loans are popular financial instruments throughout Florida, in large part because of the state’s very expensive housing market. If you’re looking to buy rental property in South Florida but are self-employed, have a gap in employment history, or don’t have conventional income tax returns, no-income DSCR loans may be a great option for you.
You’ll likely have to prove to your lender that you have liquid assets, government bonds, trust payments, investment income, state benefits, business startups, or other alternative income sources. Once you clear that bar, though, a no-income loan can help you gain entry to the high-reward South Florida housing market.
A no-income loan may also close more quickly than a traditional loan — meaning that you’ll have a leg up when making offers on time-sensitive properties.
In the end, no-income DSCR loans are great financial options for many Floridians. They’re accessible, usually have faster closing times, and are available to anyone who can prove they have the cash flow needed to meet their debt obligations.
That’s one reason why Vaster offers no-income DSCR loans for those who qualify. Contact a loan officer today for more information and to see how we can help you achieve your dream of homeownership or rental real estate investing.