What Is a Texas DSCR Loan?
Understanding Texas DSCR loans starts with familiarizing yourself with what the debt service coverage ratio (DSCR) actually is. DSCR is a ratio that shows the ability of the rental income of a property to cover the annual debt of a property. A positive DSCR indicates that you can realistically afford the loan. This ratio is what lenders use to determine whether or not you’re eligible for a DSCR loan in TX, so it’s to go into the application understanding how it works.
Texas debt service coverage ratio loans are used to help investors secure the funding they need to invest without applying for traditional Texas home loans. These loans, which allow you to forego the typical qualifying mortgage process and benefit from more flexible underwriting requirements, are known as non-QM loans. There are other types of non-QM loans available as well.
Who Are DSCR Loans for?
One thing that’s important to note is that debt service coverage ratio loans in TX are specifically designed for borrowers who are investing in property. You can’t use DSCR loans to purchase owner-occupied property, which means it’s not a loan you can use to buy a house that you plan to live in. This is because the rental income the property earns is how the loan is repaid.
DSCR loans are often highly beneficial for property investors who have had trouble securing other types of loans because they offer more flexible lending criteria.
Texas DSCR Loan Benefits
Texas DSCR Loan Benefits
If you’re looking for a real estate investment loan in Texas, there are many reasons you might consider a DSCR loan. Maybe you’re having trouble securing another type of loan, or perhaps you need the approval process to move faster than traditional loans take.
DSCR loans in Texas are more flexible than other loans, so they’re a popular choice for investors. You don’t have to provide proof of income or employment history verification, and closing times may even be faster.
One of the benefits of securing a DSCR loan with Griffin Funding is the fact that interest-only loans are available as well. These loans allow you to make payments toward the interest for the first several years, then your monthly payments are recalculated and you’ll start paying toward the principal. This allows borrowers to save substantially over the life of the loan. Griffin Funding offers fixed-rate loans on a 40-year or 30-year term.
How Is DSCR Calculated?
Understanding how DSCR is calculated is key to determining whether you should apply for a DSCR loan in Texas. In order to calculate your DSCR, lenders use a simple formula to figure out the ratio of rental income to debt. Here’s the formula for DSCR:
Debt service coverage ratio (DSCR) = annual rental income ÷ annual debt
Your rental income is determined using lease agreements and the rent schedule of a licensed appraiser; the lower of the two numbers is your rental rate. Your annual debt is the total amount you pay each year in principal, interest, taxes, insurance, and HOA fees—if you pay them. We take your total annual rental income and divide that by your total annual debt, and that gives us your DSCR. This number is then used to qualify you for the loan.
DSCR Calculation Example
If your rental income is $45,000 and your annual debt is $30,000, your DSCR is 1.5. This is a high enough DSCR to secure just about any loan, and you’ll likely secure good loan terms as well.
For an annual rental income of $15,000 and an annual debt of $20,000, you’ll end up with a DSCR of 0.75. A DSCR of 1 indicates that your rental income and annual debt are the same, while anything lower than 1 means your rental income is less than the debt accrued by that property.
What DSCR Do Lenders Look for?
What DSCR Do Lenders Look for?
When you’re applying for a loan, it’s important to understand that lenders are looking for a particular DSCR. For most lenders, that number is 1.25. A DSCR of 1.25 shows lenders that your rental income is high enough that you should be able to make your loan payments when they’re due.
At Griffin Funding, our lending criteria are a lot more flexible. You can secure one of our debt service coverage ratio loans in Texas with a DSCR as low as 075. However, it’s important to keep in mind that your loan terms will vary based on your DSCR. A DSCR of 0.75 requires 12 months of reserves, while a DSCR of 1 or higher requires just 6 months of reserves.
A minimum credit score and down payment is required.
Other Texas Loan Options for Borrowers with Low DSCR
Even if your DSCR is too low for you to secure debt service coverage ratio loans in TX, there are other similar loans you may be able to apply for. Here are some other loan programs that may be an option for you:
- Asset-based loans: You can secure a loan based on assets rather than income with asset-based loans. These assets may include accounts receivable, inventory, and more.
- Bank statement loans: Instead of providing W-2s and pay stubs for proof of income, bank statement loans allow you to use your bank statements to qualify for a loan.
- Recent credit event loans: If something happened recently that had a negative effect on your credit score, you may still be able to qualify for recent credit event loans that take that into account.
- Interest-only loans: Interest-only loans allow you to pay toward interest for a set period of time, then refigure your payments and start paying toward the principal.
Areas We Serve
Griffin Funding can help you invest in property across the state of Texas, including the following areas and more:
- Johnson City
Apply for a Texas DSCR Loan
DSCR loans in Texas are one of the best ways to pursue property investing. If you have questions about our DSCR loan program, call Griffin Funding at (855) 394-8288 to learn more today or simply apply online today.