Property investors across the state of Arizona are using debt service coverage ratio (DSCR) loans to expand their portfolios. DSCR is calculated by taking the monthly rental income and dividing it by the property's monthly payments including principal, interest, taxes, insurance, and association dues. The final DSCR ratio is essentially an indicator to the lender of a borrower's ability to repay their loan. Many lenders have a minimum DSCR of 1.2, which indicates more money coming in than out.
DSCR loans are ideal for self-employed real estate investors or for someone with a large investment portfolio. Their simplified approval process and loan terms are designed specifically for real estate investors. Let's take a closer look at the benefits of a DSCR mortgage for investment properties, how it works, and how to qualify.
Traditional loans focus heavily on debt-to-income ratio (DTI) and require substantial documentation including pay stubs, bank statements, employment history and tax returns. Meeting DTI requirements can be tricky for investors with multiple mortgaged investment properties.
With a DSCR loan, borrowers can take advantage of full 30-year terms with no balloons. Most DSCR lenders will also have the optionality for interest only loans, rate buy- downs, prepayment penalty buy downs, and rate structure choices. It is great for investors to be able to tailor their DSCR loan program to meet their investment needs. For instance, investors planning to hold onto their rental property long term can choose a fixed rate and pay higher fees, while investors who might sell in the near future can select an ARM rate structure and buy down their prepayment penalty.
For the professional investor looking to build a large real estate portfolio, a DSCR program is ideal. Most traditional mortgage lenders max out borrowers at ten loans. Instead, when evaluating qualifications for a DSCR loan, lenders will use common sense to evaluate an investor's maximum credit exposure.
The DSCR loan process is much simpler than the conventional mortgage process. Let's break it down in three basic steps:
Step 1: Complete the DSCR loan application.
Apply for your DSCR mortgage loan and get the investment property appraised, including expected market rent.
Your loan officer will get your credit evaluated to make sure you meet the minimum credit score qualifications.
Step 2: Move into processing.
Once your application is complete, your DSCR loan will move into processing. DSCR mortgage processing is relatively simple since the lender is mostly looking at the investment property quality and rental income potential.
No tax returns, no pay stubs, no employment history, and no personal income history.
Step 3: Close and get funds.
Once your DSCR loan is processed, it will move into underwriting and quality control. From there, it will be funded.
You'll cover your down payment and fees and then receive funding.
Financing a DSCR loan requires specific expertise and differs from other loans in terms of:
Underwriting Requirements: As an example, personal income history and tax returns are not considerations when underwriting a DSCR mortgage.
Appraisal Process: For a DSCR loan, an evaluation is needed of comparable rents in the area to determine market rent.
Borrower Types: Often a real estate investor finances properties in an entity, which in itself has some lending nuances. For instance, there are necessary entity documents needed to qualify.
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According to NuWire, Arizona’s growing population, strong economy, and great weather make the state ideal for investors. Not to mention its $240,000 median home price makes the state affordable.
Phoenix is the number one Arizona city where we originate investment property loans. RentCafe reported the average rental income is $1,590, and the city is 44% renter-occupied. A close second in loan origination volume for us in Arizona is Scottsdale. Not to far from Phoenix, Scottsdale is slightly more expensive with an average rental income of $2,087. There are also less rental properties with a 33% rental occupancy rate (Source: RentCafe).
If you’re considering buying rental properties in Arizona, here’s where NuWire recommends you look in addition to Phoenix and Scottsdale:
Whether you are looking to invest in long term or short-term investment properties, you can count on Visio Lending to close your Arizona DSCR mortgage. We have decades of experience helping real estate investors grow large portfolios of properties, and we've closed hundreds of loans in Arizona.
Reach out to us about your next real estate investment.
Check out some of our recently closed DSCR loans in Arizona.
Phoenix, AZ
Scottsdale, AZ
Sedona, AZ
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Visio Lending is the nation's premier lender for buy and hold investors offering, long-term loans for SFR and commercial rental properties, including vacation rentals.