Investing in real estate has never been more promising, with rising multi-family rents and capital appreciation driving opportunities for investors. Across the country, multi-family rents increased 2.6% year-over-year as of July 2024, which indicates steady growth. On top of that, the typical real estate investor’s property sold for $190,404 more than its purchase price as of June 2024.
For investors looking to capitalize on these trends, a DSCR loan Mississippi can be an ideal financing solution to expand your portfolio in the Magnolia State. Designed especially for real estate investors, DSCR loans allow you to leverage your rental income to qualify for investment property loans.
Whether you’re eyeing multi-family properties or short-term rentals, understanding how DSCR loans work can help you unlock new opportunities in Mississippi’s growing rental market. In this guide, we’ll be exploring everything you need to know about getting a DSCR loan Mississippi.
What Is a DSCR Loan?
A DSCR loan, also known as a Debt-Service Coverage Ratio loan, is a type of financing that was created with real estate investors in mind that focuses on a property’s rental income rather than your personal income. Instead of reviewing tax returns, W2s, or pay stubs, DSCR lenders use the property’s debt-service coverage ratio to determine if the property can essentially “pay for itself.” This makes it much easier for real estate investors to qualify for rental property financing and grow their portfolios.
DSCR loans are non-QM (non-qualified mortgage) loans, meaning it doesn’t have to meet the strict lending guidelines of the Consumer Financial Protection Bureau (CFPB). Because of this, DSCR lenders can set their own qualification criteria, which is typically much more flexible than conventional loan requirements.
How DSCR Loans Work
DSCR loans use the income generated by an investment property as a means of qualification rather than your personal income, making them a streamlined loan option for real estate investors.
Each property is different, so lenders use a standardized approach to determine the strength of the property’s cash flow. This is where the debt-service coverage ratio (DSCR) calculation comes into play, which we’ll cover more in depth in the following section.
This method allows you to qualify based on the property’s performance, which is appealing to investors with multiple properties or non-traditional income sources.
Calculating a Property’s DSCR
Calculating a property’s DSCR is fairly straightforward – all you have to do is divide its Net Operating Income (NOI) by its total annual debt payments.
Before calculating NOI, gather documents related to how much the property makes and how much it costs to keep it running. Next, you can calculate NOI by taking its gross rental income and subtracting its operating expenses, like property management fees, maintenance costs, utilities, and taxes.
Once you have the NOI, you can divide it by the annual debt service, which includes the principal and interest payments on the mortgage. For example, if a property generates $100,000 in gross rental income, has $30,000 in operating expenses, and $60,000 in annual debt obligations, the DSCR would be 1.17 ($70,000 NOI ÷ $60,000 debt service).
What’s Considered a Good DSCR?
A good DSCR depends on each lender’s requirements, but a DSCR of 1.25 or higher is generally considered strong. This means that the property generates 25% more income than its debt obligations.
A DSCR of 1.0 means the property earns just enough to cover its debt, making it self-sustaining but without any extra cash flow.
Some lenders, like Defy Mortgage, offer more flexibility with DSCR loans, allowing a DSCR as low as 0.75 for properties with growth potential or other factors. Even if your property doesn’t make enough to fully cover its debt obligations, DSCR loans can still be an accessible option for investors.
Expanding Your Mississippi Real Estate Portfolio with a DSCR Loan
Mississippi’s real estate market is showing strong growth potential with rising rents and home values, which offer possibly lucrative investment opportunities.
In 2023, the median rent in Mississippi surged by 14%, even as national trends saw rents declining. Now, the median rent across the Magnolia State is currently sitting at $1,450 as of November 2024.
Additionally, the median home sale price also increased by 4.8% year-over-year to $259,400 as of October 2024. This indicates promising potential for property appreciation on top of rental income.
Lastly, with the state’s population seeing its first growth last year since 2017, demand for housing is likely to remain strong. Stay ahead of the curve and use a DSCR loan to take advantage of these investment opportunities with minimal hassle and capitalize on Mississippi’s upward trend.
Pros and Cons of a DSCR Loan Mississippi
Pros:
- No personal income documents required (e.g. tax returns, W2s, and pay stubs)
- Qualify using your rental property’s income
- No hard limit on how many DSCR loans you can have, making it easier to scale your portfolio
- Take advantage of an upward trending real estate market
Cons:
- Limited availability
- Potential to get over-leveraged
- Unexpected income fluctuations (e.g. vacancies) can make it difficulty to meet loan payments
DSCR Loan Mississippi Requirements
If you plan to apply for a DSCR loan Mississippi, it’s important to keep in mind that qualification requirements vary by lender. Each lender can create their own lending criteria, meaning there’s no set standard for the industry.
To give you an idea of what requirements to expect, here is a list of what we would need for our DSCR loans at Defy Mortgage:
- 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
For exact qualification requirements from other lenders, be sure to reach out to them directly.
What Property Types Are Eligible for a DSCR Loan?
Most DSCR lenders accept a wide range of property types, as long as they’re generating enough income. Every lender will have their own list of accepted property types, but you can typically finance:
- Single-family properties
- Multi-family properties
- Vacation rentals
- Short-term rentals (like Airbnb and Vrbo)
- Some commercial properties
Before applying for a DSCR loan, remember to ask lenders whether your exact property type is eligible.
Interest Rates for a DSCR Loan Mississippi
Overall, interest rates for a DSCR loan depend on a few factors like your credit score, the lender’s policies, and the current market rate. However, you can generally expect DSCR loan interest rates to be slightly higher than conventional loan rates. Although a slightly higher rate may not be ideal, real estate investors often find this a small price to pay for a chance to take advantage of the growing real estate market.
Down Payment Requirements for a DSCR Loan Mississippi
Typically, you can expect to put down anywhere between 15-25% for a DSCR loan Mississippi. The amount you’ll have to put down depends on your credit score and the lender’s requirements. At Defy Mortgage, we require a minimum of 15% down for our DSCR loans.
DSCR Loan Mississippi Lenders
Partnering with a good lender can make a world of difference in your DSCR loan journey. When researching and choosing a lender, it’s important to find one that’s experienced with DSCR loans and working with real estate investors. You’ll be able to rely on them for guidance throughout the process and they’ll be there to answer any questions you have.
Other than experience and knowledge, another key factor to look out for is a customer support team that goes above and beyond. This way, you’ll know you’re taken care of and you’ll have reliable support even after the closing date.
If you’re looking for a lending partner that offers tailored solutions with flexible qualification requirements, Defy Mortgage has got your back. We pride ourselves on catering to the non-traditional borrower and ensuring that all of our clients find the perfect loan for them. Book a call with us today or give us a ring at (615) 622-1032 to speak to one of our mortgage experts about your options!
Alternatives to a DSCR Loan Mississippi
If you’re not fully convinced that a DSCR loan is right for you, consider these non-QM loan alternatives instead:
- Bank Statement Loans: Qualify using your bank statements.
- P&L (Profit & Loss Statement) Loans: Qualify using your business’ CPA-prepared P&L statements.
- Asset Depletion Loans: Qualify using your liquid asset portfolio.
- Fix-and-Flip Loans: Qualify based on historical experience and/or renovation plans.
- Construction Loans: Qualify based on historical experience and/or building plans.
DSCR Loan Mississippi FAQs:
- What are DSCR loans?
DSCR loans, or Debt-Service Coverage Ratio loans, are designed for real estate investors and focus on the property’s income rather than your personal income. Essentially, these loans determine whether a property can “pay for itself” using the rental income it generates.
- How is a property’s DSCR calculated?
DSCR is calculated by dividing the property’s Net Operating Income (NOI) by its total annual debt obligations. A ratio of 1.0 or higher means the property earns enough to cover its debt.
- What DSCR is usually needed to qualify for a DSCR loan in Mississippi?
Most lenders require a DSCR of at least 1.0, indicating the property can pay for itself. However, some lenders, like Defy Mortgage, may approve loans with a DSCR as low as 0.75 for properties with strong growth potential.
- What types of properties are eligible for DSCR loans?
DSCR loans can be used for various investment properties, including single-family homes, multifamily units, condos, short-term rentals, and commercial real estate.
- Are DSCR loans available for both new and experienced investors?
Yes! DSCR loans are available for both new and experienced investors, making them a great option for anyone looking to start or grow their portfolio. Lenders typically look at the property’s potential, so even first-time investors can qualify.
- Can I refinance my current mortgage to a DSCR loan?
Yes! You can refinance your current mortgage to a DSCR loan, as long as it can meet the lender’s requirements.
- Can you get a DSCR loan for a short-term rental?
Yes! You can get a DSCR loan for short-term rentals, as long as the income is consistent and it can meet the lender’s DSCR requirements.
