Understanding DSCR
Understanding Debt Service Coverage Ratio In Real Estate
Investing in a real estate property and either reselling it or renting it out for a profit can potentially be a highly lucrative way to supplement your income. Fortunately, there are certain mortgage options available that can help a borrower finance an investment property. One such option, known as a DSCR loan, can help a borrower, offers lower rates and quick approval processing. If you are located in and around the areas of Palm Beach, Tri-County, or Broward County, Florida, and have questions about your mortgage options as an investor, CTC Mortgage can help. Continue reading to learn more about debt service coverage ratio and how it can affect your investment in real estate.
What Is Debt Service Coverage Ratio?
In the world of real estate, debt service coverage ratio, or DSCR, measures the ability of a property to generate enough income to repay its debt and evaluates the borrower’s capability of fulfilling their debt obligations. DSCR is measured by the property’s overall rental income amount against its yearly mortgage debt, (which also includes taxes, interest, insurance, principal, and homeowners association fees). Measuring DSCR helps demonstrate whether a property is generating an adequate amount of income to pay off the loan. When an investor applies for financing to afford an investment property, a lender will use debt service coverage ratio as one measurement factor to determine the loan amount for a new loan or for a loan refinance. Essentially, the higher the DSCR ratio is, the higher amount of net operating is available to service that debt. As part of the underwriting process, mortgage lenders calculate the DSCR, and a real estate investor is able to adjust their offer on a rental property to create a certain debt service coverage ratio and watch that ratio to determine if it is the best time to refinance the rental property.
Steps You Can Take To Improve Your Debt Service Coverage Ratio
Both lenders and real estate investors use debt service coverage ratio to evaluate the performance of a property, and there are certain steps you can take as an investor to make improvements to your DSCR. This can allow you to optimize your chances of loan approval before you apply and increase the overall amount that you qualify for. One way to boost your DSCR is to refinance an existing loan for a better rate or a longer term; this can lower your monthly debt service amounts. You can also increase your rental rate and provide extra amenities to help attract more tenants. You can also decrease your vacancies ensuring that you address tenant concerns in a timely manner and ensure that the property remains in decent condition and upgrading the property.
If you have questions about applying for a DSCR loan or improving your DSCR, contact CTC Mortgage today for a consultation.
