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DSCR Loans Arizona: What Are They and How Do I Qualify? [2024]

DSCR Loans Arizona
DSCR Loans Arizona
Brian Reese
January 16, 2024

For real estate investors in Arizona who find traditional income verification methods like tax returns or pay stubs challenging for home loan qualification, DSCR loans Arizona present a viable alternative.

A Debt Service Coverage Ratio (DSCR) loan focuses on the income generated by the property rather than the investor’s personal income, offering a strategic advantage over traditional loans.

As an investor eyeing the Arizona market, understanding the nuances of DSCR loans is mission critical.

These loans assess the financial health of your investment based on the property’s cash flow, providing a unique pathway to financing that bypasses the conventional income documentation requirements.

Okay, let’s explore how to get an Arizona DSCR loan in more detail.

DSCR Loans Arizona: What Are They?

What is an Arizona DSCR Loan

In Arizona, securing a traditional home loan typically involves navigating a complex application process, including submitting tax returns and pay stubs.

However, for investors, there’s an alternative route: Enter DSCR loans.

These are a form of non-Qualified Mortgage (non-QM) lending, bypassing many of the traditional mortgage application hurdles.

In the realm of mortgages, QM, or “Qualifying Mortgage,” refers to a standard lending process that scrutinizes your assets, employment status, debt-to-income ratio, credit history, and more.

DSCR loans offer a solution for investors who might not meet the stringent criteria of traditional mortgages.

These asset-based loans evaluate the potential of a real estate investment based on the property’s rental income versus its debt obligations, rather than solely on the borrower’s personal financial status.

The key feature of DSCR loans is the focus on the property’s ability to cover its own debt service obligations, which include the mortgage payments, property taxes, insurance, and any other associated costs.

This is referred to as the DSCR ratio, and it’s a simple math equation.

How Do Arizona DSCR Loans Work?

Arizona DSCR loans work by focusing on the income generated by a property rather than the personal income of the borrower.

This type of loan is particularly popular among real estate investors.

Here’s a breakdown of how Arizona DSCR loans work:

Assessing Property Income: The primary factor in a DSCR loan is the property’s ability to generate income. Lenders look at the rental income the property is expected to earn and compare it to the property’s debt obligations, including the mortgage payment, property taxes, insurance, and any homeowners’ association fees.

Calculating the DSCR: The Debt Service Coverage Ratio is calculated by dividing the property’s annual net operating income (NOI) by its annual mortgage debt service. NOI is the annual income generated by the property minus operating expenses. A DSCR of 1 means the income exactly covers the debt service. Most lenders prefer a DSCR greater than 1, indicating the property generates enough income to comfortably cover the mortgage and related expenses.

Loan Approval Criteria: For a DSCR loan in Arizona, lenders primarily focus on the DSCR value. A higher ratio increases the likelihood of loan approval. Unlike traditional loans, less emphasis is placed on the borrower’s personal income, employment history, or debt-to-income ratio.

Interest Rates and Terms: DSCR loans might have different interest rates and terms compared to conventional mortgages. These terms can be influenced by the property type, loan-to-value ratio, borrower’s credit score, and the DSCR itself.

Property Types: DSCR loans in Arizona can be used for various types of investment properties, including single-family homes, multi-family units, and commercial real estate.

Flexibility: These loans offer more flexibility for investors, especially those who might not qualify for traditional financing due to irregular income patterns or who own multiple properties.

Application Process: The application process for a DSCR loan typically requires less documentation regarding personal income. However, thorough documentation related to the property’s income potential and operating expenses is crucial.

In essence, DSCR loans in Arizona offer an alternative route to financing for real estate investors, focusing on the income-producing potential of the property rather than the personal financial situation of the borrower.

This makes them an attractive option for investors who may have significant assets but fluctuating personal incomes, or for those looking to quickly expand their real estate portfolios without the constraints of traditional mortgage qualifications.

How Do I Calculate DSCR in Arizona?

The DSCR Equation Explained

Here are some examples of how to calculate DSCR for Arizona properties with examples of different ratios:

DSCR = (Rent / PITIA)

PITIA = Principle, Interest, Taxes, Insurance, and Association Dues

For a commercial or multi-family property, DSCR is calculated by dividing the annual Net Operating Income (NOI) by the Annual Debt Service.

Note: The Annual Debt Service is the same as the annual PITIA.

What about Commercial Property DSCR?

For example, if a property generates NOI of $60,000 annually and its annual debt service is $48,275, the equation is:

DSCR = ($60,000 / $48,275) = 1.24

The annual debt service in this example is less than the Net Operating Income, which makes the monthly cash flow positive.

What is a Good DSCR Ratio in Arizona?

A “good” DSCR ratio is any number above 1.20.

Lenders typically look for a DSCR ratio above 1.20, means the property is cash flow positive at a healthy profit.

  • If your DSCR is greater than 1.00, you are cash flow positive at a profit.
  • If your DSCR is less than 1.00, you are cash flow negative at a loss.
  • If your DSCR equals 1.00, you are cash flow neutral and break-even.

Debt-Service Coverage Ratio (DSCR) loans are commonly used for various property types within the real estate market.

The suitability of DSCR loans depends on the income-generating potential and risk associated with each property type.

What Types of Properties in Arizona Qualify for a DSCR Loan?

Here are some property types that usually qualify for Arizona DSCR loans:

  • Multifamily Properties
  • Commercial Properties
  • Vacation Rentals Including Airbnb Properties
  • Mixed-Use Properties
  • Single-Family Rentals
  • Student Housing
  • Assisted Living Facilities
  • Mobile Home Parks

Arizona DSCR Loan: What Do I Need to Qualify?

Arizona DSCR loan requirements can vary depending on the lender, the type of loan, and the specific circumstances of the borrower.

However, here are some common DSCR loan requirements that lenders will look for:

DSCR Ratio: Lenders often specify a minimum DSCR requirement that borrowers must meet to qualify for the loan. This threshold is typically expressed as a ratio, such as 1.25:1 or 1.50:1, indicating that the cash flow generated by the property or business must be at least 1.25 or 1.50 times greater than the debt service (principal and interest payments).

Historical Cash Flow: Lenders may require borrowers to provide historical financial statements (typically the last two to three years) to demonstrate the property or business’s ability to generate sufficient cash flow to cover debt obligations.

Future Projections: Borrowers may need to provide financial projections or a business plan showing that they can maintain the required DSCR throughout the loan term. These projections should be realistic and based on reasonable assumptions.

Property or Business Appraisal: For real estate related DSCR loans, lenders often require a professional appraisal of the property to determine its current market value and ensure it provides adequate collateral for the loan.

Creditworthiness: Lenders evaluate the creditworthiness of borrowers, including their credit scores, financial history, and overall financial stability. A strong credit profile can improve the chances of loan approval. Many lenders offering DSCR loans look for a minimum credit score in the range of 620 to 680. This range can provide a baseline for what lenders consider an acceptable level of credit risk. However, some lenders may be more flexible and might accept lower credit scores, especially if the property’s income potential is particularly strong and the loan-to-value (LTV) ratio is favorable.

Loan-to-Value (LTV) Ratio: In real estate lending, lenders may also consider the loan-to-value ratio, which compares the loan amount to the property’s appraised value. A lower LTV ratio can reduce risk for the lender.

Debt Obligations: Lenders assess the borrower’s existing debt obligations, including outstanding loans and credit lines. They want to ensure that the borrower has the capacity to take on additional debt without becoming overleveraged.

Loan Term: The length of the loan term can affect DSCR requirements. Longer-term loans may have lower DSCR thresholds compared to shorter-term loans.

Interest Rate: The interest rate on the loan can impact the DSCR, as higher interest rates increase the debt service costs. Borrowers should be prepared for possible interest rate fluctuations during the loan term.

Documentation: Borrowers are typically required to provide detailed financial documentation, including tax returns, bank statements, income statements, balance sheets, and other relevant financial records.

Property or Business Type: The type of property or business being financed can influence the DSCR loan requirements. Some property types may have stricter DSCR criteria due to their perceived risk levels.

Guarantees: Lenders may require personal or corporate guarantees, especially for commercial loans. These guarantees add an extra layer of assurance that the debt will be repaid.

It’s essential for borrowers to carefully review the specific DSCR loan requirements provided by their lender and ensure they meet all the criteria before applying for the loan.

Additionally, borrowers should consider working with financial advisors or consultants to prepare a strong loan application and meet the lender’s expectations.

District Lending Offers DSCR Loans in Arizona!

District Lending is a veteran-owned Arizona based DSCR lender with 20+ years of experience handling DSCR loans for real estate investors.

We will help you close fast and can navigate the nuances of DSCR loans on your behalf (you don’t need to sweat the details).

Why get a DSCR Loan with District Lending?

  • Our team at District Lending will do the heavy lifting for you by shopping and comparing the nuisances of different lenders to fine tune the rate and experience.
  • Insanely low documentation, no personal DTI calculations, no tax returns needed.
  • Ultra fast closings on DSCR loans, sometimes in 14 days or less.
  • Protection by using an LLC or other business entity.
  • Real estate investors can get more than 10 mortgages with DSCR.
  • Rent must at least cover the debt to be eligible.

Looking for an Arizona DSCR Loan at a Great Low Rate? WE CAN HELP!

You’ve got questions about Arizona DSCR loans.

We’ve got expert answers!

If you’re looking for a DSCR loan on an investment property in Arizona, and want to close quickly and easily, you can get in touch with us HERE.

>> Click HERE to get an Arizona DSCR loan rate in 60 seconds or less!

About the Author

Brian Reese is a senior advisor and co-owner at District Lending. He is one of the world’s leading experts in veteran benefits, having helped millions of veterans secure their financial future since 2013. Brian is the founder VA Claims Insider, an education-based Coaching & Consulting company whose mission is to educate and empower veterans to get the VA disability benefits they’ve earned for their honorable service. A former active-duty air force officer, Brian deployed to Afghanistan in support of Operation Enduring Freedom. He is a distinguished graduate of management of the United States Air Force Academy and earned his MBA as a National Honor Scholar from the Spears School of Business at Oklahoma State University.

“As a military veteran, I’ve made it my life’s mission to help people live happier and wealthier lives. District Lending brings this mission to life. We believe in integrity, honesty, and transparency, which is why you’ll see our rates right on our website. You’ll find lower rates and zero lending fees, which means you can buy your dream home for less. The savings are passed on to you — the way it should be.”

– Brian Reese, Advisor and Co-Owner, District Lending

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