If you’re a real estate investor looking for financing options to scale your Connecticut rental property portfolio, a DSCR loan might just be the perfect solution. Over the past few years, these loans have grown in popularity, representing roughly half of the approximately 201,000 loans included in non-QM securitizations rated by S&P Global between 2018 and February 2023. What makes DSCR loans so unique is that they focus on the property’s income potential – not your personal income.
In this guide, we’ll be covering how you can use a DSCR loan Connecticut to grow your real estate portfolio without limits. Learn how you can tap into the passive investing strategy of rental properties.
What Is a DSCR Loan?
A DSCR loan, or a debt-service coverage ratio loan, is a type of real estate financing that bases qualification on the cash flow generated by the investment property rather than your personal income. Designed with real estate investors in mind, these loans can help you scale your rental portfolio quickly with no hard limit on how many DSCR loans you can have.
Since DSCR loans don’t need your personal income for approval, they’re considered to be non-qualified mortgage (non-QM) loans. Non-QM loans don’t fit the traditional lending guidelines set by the Consumer Financial Protection Bureau (CFPB), making them much easier to qualify for compared to conventional loans. Being able to use alternative income verification makes them a popular choice for investors who typically have multiple, non-traditional income sources that aren’t reflected accurately on their tax returns.
How Can I Calculate DSCR?
The first step to calculating DSCR is gathering the property’s financial data, including rental income, operating expenses, and the mortgage payments. Once you have all of these numbers, calculating DSCR is easy.
Begin by subtracting your operating expenses from the property’s rental income to arrive at your net operating income (NOI). Now that we know how much income your property is generating after operating expenses, we’ll divide that number by the annual mortgage payments to arrive at the DSCR.
Here is a simplified version of the formula:
What Is a Good DSCR Ratio?
Now that you’ve calculated your property’s DSCR, you might be wondering, “So, is this good or bad? Can I qualify?”
Luckily, interpreting your DSCR also isn’t too difficult. A DSCR of 1.0 or over means the property’s income can cover its loan payments, whereas a DSCR of below 1.0 means the property’s income cannot cover its loan payments. Most DSCR lenders consider 1.25 or above to be a strong DSCR, but some lenders, like us at Defy, allow DSCRs as low as 0.75.
Growing Your Connecticut Rental Portfolio with DSCR Loans
If you’re thinking of expanding your Connecticut rental portfolio with DSCR loans, now is the time. With a rental vacancy rate of just 3.8% as of March 2024, well below the 5% mark that indicates a tight housing market, demand for rental properties is high. Connecticut’s population continues to grow steadily, increasing by 0.23% in 2023, driving demand for housing even higher. The median sale price of homes in the state increased by a whopping 78.1% between January 2020 and August 2024, while the average rent stands at $1,792 per month for a one-bedroom. The combination of low vacancy rates, a steadily growing population, and rising property values makes for a potentially lucrative investment opportunity – and a DSCR loan can be the perfect tool to help.
DSCR Loan Connecticut Requirements
As a non-QM loan, DSCR loan requirements tend to vary since lenders can set their own qualification criteria. While shopping around for DSCR lenders, you can contact them directly to find out their specific requirements.
At Defy, these are our DSCR loan requirements:
- Minimum DSCR ratio of 0.75
- Minimum FICO score of 620+
- Maximum LTV of 85%
- 3 months cash reserve
- No maximum loan amount
- No income documents or tax returns
- Interest-only options available
DSCR Loan Connecticut Interest Rates
Interest rates for a DSCR loan Connecticut can vary by lender, your credit score, and the current market conditions. Having a higher credit score can typically help you secure a lower interest rate.
One thing to keep in mind is that DSCR loan interest rates are usually slightly higher than conventional loan rates. However, this higher interest rate could be worth it for real estate investors who have the potential to profit not only from monthly rent but also home value appreciation. As of August 2024, the median sale price of a Connecticut home was $460,200, which is an 8% increase compared to the previous year. Take advantage of the growing Connecticut housing market now rather than waiting on the sidelines.
DSCR Loan Connecticut Down Payment
Depending on your credit score and the lender, DSCR loan down payments can range between 15-30%. At Defy, we require a minimum of 15% down for our DSCR loans. Although these down payment amounts are higher than you’d see for conventional loans, a larger down payment makes it easier to meet the required DSCR and increase your chances of approval. The upfront cost may be higher, but the benefits of flexible qualification and being able to finance multiple investment properties can make it worthwhile for serious real estate investors.
To get a better idea of how much you’d have to put down, we’d recommend contacting lenders directly or requesting a pre-approval.
DSCR Loan Connecticut Lenders
Finding the right DSCR lender in Connecticut is key to making the most of your real estate investment opportunities, especially in a competitive market with rising home prices. Getting a mortgage is a big deal, so it’s smart to weigh all your options before picking a lender. You’ll want to find someone who understands Connecticut’s unique real estate market and can offer flexible terms to help grow your rental portfolio.
At Defy Mortgage, we’re all about offering tailored DSCR loans that qualify you based on the property’s cash flow – not your personal income. Our experienced team is here to help you navigate Connecticut’s market and secure the financing you need to make the most of it. If you’re ready to jump into real estate investing, schedule a free call with one of our mortgage experts today!
Pros and Cons of a DSCR Loan Connecticut
Pros:
- Qualify based on the property’s rental income, making it easier for investors who have non-traditional income
- No personal income documents required
- Allow you to finance a wide range of properties, including single-family homes, multi-family units, and commercial real estate
- Build a rental portfolio faster without the limitations of your personal income
- No hard limit on how many DSCR loans you can have
Cons:
- Higher down payment compared to conventional loans
- Slightly higher interest rates compared to conventional loans
- Limited to purchasing investment properties, so primary residences are not eligible
DSCR Loan Connecticut Alternatives
If a DSCR loan Connecticut sounds like it might not be the best fit for you, there are plenty of other non-QM loans available. Here are some alternatives to consider:
- Bank Statement Loan: A bank statement loan allows you to qualify based on their bank deposits rather than traditional income verification, making it ideal for self-employed individuals or those with irregular income.
- P&L Loan: A P&L (profit and loss statement) loan uses your business’ CPA-prepared profit and loss statements to verify income instead of traditional tax returns. This type of loan is ideal for business owners who have steady cash flow.
- Fix-and-Flip Loan: A fix-and-flip loan is a short-term loan designed for real estate investors looking to purchase, renovate, and quickly sell a property for profit.
- Construction Loan: A construction loan is a short-term loan used to finance the building or renovation of a property, covering costs like land, materials, and labor. Once the construction is complete, borrowers typically refinance into a permanent mortgage or sell the property to repay the loan.
At Defy, we offer all of these non-QM loan options and more – contact us today to get started on your homebuying journey!
DSCR Loan Connecticut FAQs:
- What is a DSCR loan, and how does it work in Connecticut?
A DSCR loan is short for a debt-service coverage ratio loan, which is a type of financing that allows real estate investors to qualify with their property’s income, rather than their personal income. DSCR lenders determine whether the property’s rental income is enough to cover the mortgage payments, essentially “paying for itself.”
- What is the minimum DSCR ratio required to qualify for a DSCR loan in Connecticut?
Usually, DSCR lenders in Connecticut look for a DSCR ratio of 1.0 to 1.25 or higher, which means the property is making enough income to cover 100% to 125% of the mortgage payments. Specific DSCR requirements vary by lender – for example, at Defy, we only require a minimum DSCR of 0.75 to qualify.
- How is the DSCR calculated for investment properties?
You can calculate your property’s DSCR by dividing the property’s net operating income (NOI) by its total debt service, which includes both principal and interest payments. A DSCR greater than 1 means that the property’s income exceeds its debt obligations.
- Can I use a DSCR loan in Connecticut to finance multiple investment properties?
Yes! You can use a DSCR loan Connecticut to finance more than one investment property. There’s no hard limit to how many DSCR loans you can have, making it easier than ever to quickly scale your rental property portfolio.
- What are the credit score requirements for a DSCR loan in Connecticut?
Most DSCR lenders in Connecticut look for a minimum credit score of 620-680, but the exact requirement varies by lender. At Defy, we require a minimum FICO score of 620 or higher for our DSCR loans. Keep in mind that a higher credit score can lead to better loan terms and lower interest rates.
- Do I need personal income verification to qualify for a DSCR loan in Connecticut?
Nope! Personal income verification isn’t typically required for DSCR loans.
- What types of properties can I finance with a DSCR loan in Connecticut?
You can finance a variety of property types with a DSCR loan Connecticut, including single-family, multi-family, and commercial properties.
- How do DSCR loan interest rates in Connecticut compare to traditional loans?
You can generally expect DSCR loan interest rates to be slightly higher than traditional loans, but the flexibility these loans provide are often worth it for real estate investors looking to grow their rental property portfolio.
- Can I refinance an existing property with a DSCR loan in Connecticut?
Yes! You can refinance an existing property with a DSCR loan Connecticut. This is a great way to access equity in the property or lower your interest rate.
