Suffolk is the 4th most populous County in Massachusetts, with almost 800,000 residents. The country comprises 22 cities and boasts a vibrant real estate market. The median listing price for homes in Suffolk County is $750K, with most home selling for about $652K.
Despite the steep asking prices, the average property in Suffolk County, MA, is on the market for 71 days. The steep home price tags drive the demand for rental properties in the County, making it the perfect real estate investment destination.
Real estate investors are increasingly using Debt Service Coverage Ratio (DSCR) loans to grow their real estate holdings in Suffolk County. These quick and convenient investment loans are ideal for scaling your real estate portfolio in Suffolk County, MA.
Why get a DSCR loan in Suffolk County?
There are many advantages to owning rental property in the 4th most populous County in Massachusetts.
- The medium household income is $74,881
- The average rental income in Suffolk County is almost $600 higher than the national average. A two-bedroom home fetches $1,642 per month.
- 64% of the County’s 800,000 residents rent their homes
- Suffolk County ranks as the best County for young professionals in Massachusetts.
This is a highlight of some of the factors that hallmark Suffolk County as an ideal real estate investment destination. The County’s 22 cities create plenty of employment opportunities for young professionals. The popularity of working remotely continues to attract people in droves, creating a steep demand for rental properties.
While the higher-than-average property prices raise the entry barrier, applying for a DSCR loan can help you fund your next real estate project. Unlike standard property loans, DSCR loans aren’t tied to your personal income. Instead, they use the revenue from your existing rental property to determine eligibility.
If your monthly cash flow is sufficient to cover the loan’s monthly repayments, you have a high chance of qualifying for a DSCR loan. Since the loan is a unique product for real estate investors, the application process is quick and painless. They’re optimized for a speedy turnaround to help you quickly scale your real estate holdings.
DSCR loans are formulated to accommodate the specific needs of full-time investors, self-employed landlords, or anyone with a complex tax structure.
How Does a DSCR loan work?
Most real estate investors find income verification a huge stumbling block when applying for a mortgage loan. DSCR loans are a welcome alternative to traditional mortgage loans because eligibility isn’t tied to income verification.
Instead of requiring you to prove that your personal income can cover the monthly repayments, DSCR uses your monthly rental income to determine your credibility.
Personal income verification is a tedious process involving multiple documents, including pay stubs, tax returns, and bank statements. DSCR loans eliminate these requirements, allowing faster loan processing and fund disbursement.
DSCR loans are a godsend for the consummate investor looking to expand their portfolio holding in a competitive market such as Massachusetts. Using rental income to determine eligibility drastically reduces the processing time to let you close more deals and pad your portfolio.
With a DSCR loan, you only need to show the lender that your rental income covers the monthly payment. Do that, and you can close your new property in Suffolk County, MA, in weeks, if not days. Buying an investment property in Massachusetts doesn’t get easier than that.
How is DSCR calculated?
A DSCR loan is calculated using the net monthly income from your rental property and the expected monthly mortgage payments on the DSCR loan. Net income is computed using PITIA – principle, interest, taxes, insurance, HOA, and other fees.
Since DSCR is a division product, it’s expressed as a decimal, such as 1.6 or 1.6x. In this case, a DSCR of 1.6 shows the rental property’s monthly income is 60% higher than the monthly income on the DSCR loan.
Naturally, higher ratios are preferable because they attest to your creditworthiness. A high DSCR score, higher than 1.0, increases your chances of buying choice real estate in Suffolk County, Massachusetts. Ratios below 1.0 might complicate the process, but they don’t automatically rule you out. Anything below 1.0 points to a negative cash flow.
DSCR is easy to calculate since it uses two figures – your net income and monthly repayments on the loan.
DSCR = Income/ Monthly Payment
For instance, if your rental property generates $3,500, a $2,800 monthly payment would produce a DSCR of 1.25. That indicates the rental income from your investment property is 25% higher than the monthly payments. The positive cash flow would prompt any DSCR lender in Suffolk County to approve your loan application.
How to Determine DSCR Income
The process of determining DSCR income depends on the type of rental property you currently own.
You’ll consider the monthly rental income if using a residential property to apply for a DSCR loan.
The DSCR income for a commercial property is calculated using a 12-month Net Operating Income (NOI). NOI refers to the property’s annual net income. It’s the amount of money remaining after tax and other overheads, including maintenance and management fees.
How to Determine DSCR payment
Lenders use PITIA to calculate the monthly payments on a DSCR if you’re using the income from a residential property in your loan application. PITIA is an acronym for principal, interest, property taxes, interest, and homeowners’ association fees (HOA), if any.
You have a better chance of getting a DSCR loan approval if your ratio is higher than 1.0, but 1.25x is preferable. If your DSCR ratio is borderline or lower than this threshold, you may consider raising it.
A higher DSCR increases your eligibility and creditworthiness, entitling you to better interest rates and friendly terms. You may increase the DSCR ratio by increasing the rent on the property or lowering the loan’s monthly payments.
Both methods can help you raise your DSCR ratio but lowering the monthly payments gets you faster results. On the flip side, increasing the rent may be time-consuming, but it leaves you in better financial shape.
Example: Raising rent to improve DSCR
Example: Lowering your monthly repayments
Practicability, financial position, timelines, and legality are factors to consider when choosing between the methods. You may successfully combine both methods to achieve even higher DSCR scores.
Raising rent may be the most favorable method to boost your DSCR score, but it has some limitations. You must ensure the rent hikes are lawful, align with the market’s going rates, and are well-timed. You may consider remodeling the property to justify the higher prices.
Conversely, you may consider lowering the monthly payments on the DSCR loan for immediate results. Remember, reducing the loan amount stretches out the repayment period. A longer repayment term can make a DSCR loan more expensive.
Whichever method you choose can help you increase the DSCR ratio and increase the lender’s confidence in your ability to repay the DSCR loan.
What is the minimum DSCR to qualify in Suffolk County, MA?
There are no hard DSCR requirements in Suffolk County, MA. DSCR lenders set their minimum DSCR requirements depending on their experience and risk appetite. However, most lenders prioritize borrowers with a 1.25x DSCR ratio, but others are 1x DSCR ratios.
Some DSCR lenders are even more accommodating and still provide the loan if your ratio is less than 1.0. A DSCR loan lower than 1.0 indicates that your property is operating at a loss.
However, the lender may need you to raise a down payment or verify your income when applying for a DSCR loan with a negative cash flow. These additional steps help lenders lower their rent exposure.
By shopping around, you may get a DSCR lender willing to accommodate your needs. However, you stand a higher chance of maximizing the benefits of the DSCR loan program if your ratio is 1.25x or higher. A DSCR ratio of less than 1.0 might mean topping up the monthly repayments, which may leave you out of pocket.
How to Qualify for a DSCR Loan in Suffolk County
Real estate investors can readily secure a DSCR loan in Suffolk County without verifying their personal income. Pay stubs, tax returns, and other documents aren’t necessary when applying for this low-doc credit facility.
While rental income is the primary consideration when applying for a DSCR loan, there are additional requirements. You’ll need to fulfill these requirements to use a DSCR loan to purchase an investment property in Suffolk County, MA.
- Loan-to-value (LTV): DSCR lenders in Suffolk County require a 20-25% deposit. You’ll need a 75-80% loan-to-value (LTV), which is equivalent to building a 20-25% equity in the rental property.
- Credit score: DSCR loans have a lower FICO score requirement than standard mortgage loans. Most DSCR lenders in Suffolk County require a score of 640 but can also accommodate FICO scores as low as 620.
- Loan purpose: Since the DSCR loan is a business loan, you may only use it to grow your real estate investment portfolio, refinance existing mortgages, or take cash out of your real estate portfolio.
- Verify future rental income: Lenders will need you to require you to verify the property’s rental income. They need to know that it generates enough money to cover the monthly payment on your DSCR loan. Getting an appraiser to fill in the Fannie Mae Form 1007 (Single Family Comparable Rent Schedule) is easier and more efficient.
- Property types: A DSCR loan gives you the leeway to a diverse range of investment properties in Suffolk County. They range from single to multifamily residences, townhouses to condos and condotel, and commercial buildings with more than five units.
- Property use: Only real estate investment properties are eligible for a DSCR loan. These might be short- and long-term rental properties.
- Loan types: There are three DSCR loans; a 30-year fixed rate, 5-year ARM, and 5-year interest-only loan.
- Maximum loan amount: DSCR loans in Suffolk County have a $5 million cap. That’s more than enough to pad your portfolio with profitable properties. Most DSCR loans fall in the $1-2 million range.
- Property limitations: You may use DSCR loans to finance as many properties as you wish to buy. You may even apply for multiple DSCR loans when you need to grow your portfolio quickly.
- Cash reserves: Most lenders require borrowers to have some cash reserves when applying for a DSCR loan. Typically, you need cash reserves to cover six mortgage payments. However, you may need cash reserves to cover an entire year if your DSCR is low.
- Prepayment penalties: Most DSCR loans carry a prepayment penalty to discourage borrowers from refinancing or selling too quickly. The prepayment penalty is set as a percentage of the principle. Maintaining the loan for the minimum required time can help you avoid these hefty penalties.
- Debt-to-income ratio, income, and employment: DSCR lenders in Suffolk County don’t use your income, DTI, or employment history to determine your creditworthiness. You only need to prove that your rental income covers the monthly payments.
- Closing as an LLC: Most lenders allow borrowers to use a registered LLC to close a DSCR loan.
- Closing costs: Most DSCR lenders in Suffolk County allow sellers to cover a fraction of the closing costs up to a preset limit.
The Cost of DSCR Mortgage in Suffolk County, Massachusetts
For all their convenience and flexibility, DSCR loans often have a higher interest rate than standard mortgages. The typical interest rate on a DSCR loan in Suffolk County is 1-2% higher than a conventional mortgage.
However, the income requirement waiver, low documentation, and short processing time compensate for the slightly higher rates. In any case, the high rental prices in Suffolk County still leave you profitable.
The cost and fees associated with securing a DSCR loan in Suffolk County include:
- Origination fee: DSCR loans in Suffolk County attract an origination fee of 0.5% to 1%. The rates vary between lenders, with some waiving it altogether. So be sure to shop around.
- Appraisal fee: You’ll need an appraiser to assess the property’s value. Most appraisers in Suffolk County charge $300 to $500 for their services.
- Mortgage rate: DSCR loans carry a premium interest rate that’s 1% to 2% higher than market rates. However, having a high DSCR ratio is crucial in securing competitive interest rates on your DSCR mortgage.
- Closing expenses: The closing fees on a DSCR loan cover the appraisal, origination fee, title, and escrow fees. The rates vary between lenders, so shop around for the best deals.
How to Apply for a DSCR Loan in Suffolk County
You may initiate a DSCR loan through a mortgage broker or a direct lender. You’d need to furnish the lender with details about your investment property. They require details such as the rental income, address, type, and number of units.
The DSCR Loan Application Process in Suffolk County
- Underwriting: The lender will outline every aspect of the loan, including the terms, loan’s value, period, and more. They’ll also determine your DSCR ratio.
- Documentation: You’ll need to complete the standard home loan documentation when taking out a DSCR loan in Suffolk County. However, there’s one key difference. You’ll only provide financial documentation about your rental property, not your personal income history. That’s primarily because eligibility for a DSCR loan comes down to your DSCR ratio, not your personal income.
- Closing: DSCR loans have a shorter application process than conventional home loans. That’s because they don’t require the lender to dig into your financial history. Once approved for the loan, the lender will provide a loan estimate detailing the interest rates, monthly repayment, and closing fees.
- Accepting: If you accept the terms in the loan estimate, the lender will send you a pre-qualification letter. You’ll need to pay for property appraisal and submit the report to the lender. Completing the assessment initiates the mortgage underwriting process, after which you get to sign the final loan documentation. The lender will disburse the money shortly after closing on the loan.
Build a Real Estate Empire in Suffolk County with DSCR Loans
Securing a DSCR loan is the fastest way to scale your real estate investment in Suffolk County, MA. You can use the loan to finance various investment properties, including family multifamily homes, commercial complexes, hotels, or even resorts.
Since DSCR loans require little documentation and aren’t tied to your personal income, they’re readily accessible. Contact a reliable DSCR lender in Suffolk County and build an impressive real estate portfolio in the healthiest County in Massachusetts.