Property investors have found great success in DSCR loans for a straightforward reason: they provide a far more streamlined process than conventional loans, which require extensive research into a borrower's financial details. For DSCR loans, the borrower's creditworthiness and the property's net operating income are all that matters.
When it comes to real estate investment loans, the primary focus should be on how your rental properties perform in the real estate market, and DSCR loans recognize this. The buyer's income has no bearing on approval, only the property's ability to satisfy the debt service.
This makes DSCR loans an excellent choice for buying investment properties, particularly with borrowers whose employment history or debt-to-income ratio may disqualify them from conventional loans.
Another crucial reason why real estate investors prefer DSCR loans is that, unlike traditional loans, they can be signed under a corporate entity rather than their own name. This is vital in commercial real estate because should there be an issue with the investor's rental properties, their personal finances will not be impacted.
DSCR loans have long repayment periods and prepayment penalties at the onset of the loan; this makes them great for a real estate investor who is planning to hold on to their investment property for the long term. A shorter term means higher loan payments, which can significantly suppress an investor's monthly rental income, making it easier to meet their investment goals.
With a DSCR loan, you have up to 30 years to pay it off, encouraging you to choose more subdued markets with great potential - such as those in Michigan.
The DSCR loan process is quite simple compared to a conventional mortgage, as DSCR lenders focus primarily on the property's monthly rental income compared to the debt service. This is called the debt service coverage ratio: divide the rental income by PITIA (principal, interest, taxes, insurance, and association fees), and you have a ratio that indicates whether rental properties have positive or negative cash flow.
The minimum credit score for a Michigan DSCR loan is relatively low, at between 620 to 640; this makes it far easier for real estate investors to break into the rental market here, as other states require scores of 680 or more. Visio Lending has a minimum requirement of 680. Your credit score determines the interest rates you can access; the interest rate for a DSCR loan is often 1% to 2% more than traditional loans.
How does a DSCR loan work? It's simple: you divide the rental income by the mortgage payment. Calculating DSCR is the most crucial component of this type of real estate loan, and you should strive for a score of 1.0 at the very least.
Most lenders want an even stronger profile of 1.2, so you should consider boosting rental income by raising prices to the market rent and offering enticements like waiving pet fees.
You will need to appraise the property and submit a rent schedule to prove that it is making sufficient rental income. If your property has previous tenants, you should also show documentation like lease agreements to demonstrate its successful income generation history.
The loan-to-value ratio refers to the size of your DSCR loan compared to the purchase price. Most DSCR lenders want an LTV of no more than 80%, with many seeking 75% or less. This directly impacts your down payment, so it's crucial to understand what lenders expect from you upfront.
In proportion to your LTV, you'll need to provide a minimum down payment of at least 20%. You'll also need to pay origination fees like closing costs.
Unlike traditional loans, you'll need to pay a percentage of the principal if you pay off your DSCR loan ahead of time, usually on a decreasing schedule in relation to the loan's seasoning.
Beautiful Michigan is full of excellent markets, each with its own unique strengths, but these are the five hottest markets based on economic growth, earning potential, and demographics. While many investors choose to pour money into more prominent cities like Dearborn or Detroit, there's great potential in the medium-sized towns that make up Michigan's heartland.
The Grand Rapids economy is expected to grow twice the national average, meaning that real estate investors should jump in before this city takes off. Currently, the average rental income is $1,550 for residential properties, while commercial properties make about $18.33 per square foot.
Ann Arbor is a college town, meaning it needs plenty of rental property for students and retail shops to satiate culture-hungry youth. Rents are much higher here at $2,250, and a commercial property's monthly rental income is around $25.99 per square foot.
Lush with untapped potential, Macomb Township is an outdoor paradise with lots of recreational activities for tourists; this means short-term rentals are often more lucrative than longer terms. It has some of the lowest rent in the state at just $1,122 per month, while commercial rental income is a bit higher at $22.86 per square foot. In comparison, vacation rentals make, on average, about $140 a night.
The largest municipality on Cape Cod, Barnstable, is home to breathtaking scenery, diverse wildlife, and a friendly downtown. Vacationers flock to the region to enjoy its art galleries, small shops, and excellent food scene, ensuring steady tourist income throughout the summer.
Residential rental property provides about $3,000 per month; commercial spaces are sparse here, but they average about $20 per square foot.
Traverse City is a winter wonderland popular with tourists, but it also has a very high rental population of almost 40%, making it great for real estate investments. Its rental income is slightly lower than Ann Arbor's at only $2,100. On the commercial rental real estate side, office space makes more than retail: $22.33 per square foot versus $17.52 per square foot, respectively.
Another college town, Kalamazoo is known for its laid-back culture, home to both Kalamazoo College and Western Michigan University. Rents are quite low at $1,200 per month across all property types, but this may rise soon: tourism has taken off here, with spending up almost 40% since 2020. Like Traverse City, its strength lies mainly in office buildings, which make $23.08 per square foot; retail spaces make only $17.29 per square foot.
We're one of the best DSCR lenders in the nation; our loan officers have helped thousands of real estate investors get started building their investment portfolios through DSCR loans. We provide a simple and streamlined process with highly advantageous loan terms, and we never require income verification from our borrowers.
Whether you'd like to fund investment properties in Traverse City, Kalamazoo, or beyond, Visio Lending is here to help. Contact us today to learn more about your loan options and whether your promising property qualifies for a DSCR loan in Michigan.
Check out some of Visio Lending's recently closed DSCR loans in Michigan.
Erie, MI
Grand Rapids, MI
Lansing, MI
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Visio Lending is the nation's premier lender for buy and hold investors offering, long-term loans for SFR rental properties, including vacation rentals.