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DSCR Loan Arizona | Your Real Estate Investment Guide

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For investors eyeing the commercial real estate market in Arizona, DSCR loans offer an appealing alternative. If credit score or income verification criteria are constraints — as in conventional mortgages— DSCR loans in Arizona are a good option. 

Real estate investors in Arizona are increasingly opting for DSCR loans due to its straightforward application process and minimal requirements. 

They can avoid the complexities of traditional loan applications, like providing tax returns and pay stubs. 

However, before furnishing a DSCR loan in Arizona, it's essential to understand how these loans function, their prerequisites, and the steps to secure them.

What is a DSCR Loan

The debt service coverage ratio (DSCR) is a critical financial health metric for properties. It’s calculated by comparing the property's net operating income (coverage) to the amount owed (debt). 

This ratio gives investors insight into a property's ability to generate sufficient cash flow to cover its predicted expenses. 

These loans assess debt servicing capacity by focusing on the property's income potential rather than the borrower's income, as in conventional mortgages. 

Thus, they are a form of non-qualified mortgages

The focal point is the property's capacity to meet its debt service obligations independently. This includes

  • Insurance
  • Property taxes
  • Mortgage payments
  • Associated costs

How to calculate DSCR Loan Arizona

You can easily calculate a DSCR loan. This calculation occurs between the lender and the borrower during the loan approval process. 

Two fundamental values are taken: 

  1. The property's net operating income (NOI) 
  2. Total debt servicing value

Adding up the principal, interest, taxes, and insurance (PITI) payments gives us the total debt servicing. 

Then, divide the NOI by the PITI to get the debt service coverage ratio. 

Let's take an example. Suppose a property generates NOI of $50,000 per year with annual debt service being $32,000. 

So, 

DSCR = Net Operating Income / Total Debt Service 

DSCR = $50,000 / $32,000 = 1.5

Note:  Net Operating Income = Income − COE

COE = Certain operating expenses

Benefits of a DSCR Loan in Arizona

Lower Interest Rates 

DSCR loans have lower interest rates and terms compared to conventional mortgages. 

The interest rates can vary widely depending on factors like

  • The property type
  • Loan-To-Value Ratio 
  • Borrower's credit score 
  • DSCR itself 

A strong ratio, typically 2 or above, means that lenders can offer attractive interest rates — potentially as low as 5.99%. Even if interest rates appear high, investors often find a good trade-off with favorable terms. 

In Arizona, DSCR loan interest rates are slightly lower than the national average. This trend is partly due to the higher median home prices in Arizona

However, as the loan amount increases, interest rates tend to fall. This renders DSCR loans in Arizona even more appealing with lower interest rates.

Longer Repayment Terms

Longer repayment terms allow investors to meet their goals without repayment restraints and stable financial planning. 

No Income Verification Requirement

The property’s NOI sufficiently covers the debt, so the lender does not need to verify your personal income or employment details. Thus, it is ideal for investors who are reluctant to share income information. 

New investors can also benefit. Fresh investors tend to have limited personal tax returns that show substantial income. In fact, real estate investment is often chosen to avoid employment taxes. 

Lesser Down Payment

DSCR loans in Arizona require lower down payments than traditional loans. So, investors can reserve capital to expand their portfolio by diversifying avenues. Down payments can fall as low as 20%.

Tax Benefits

The interest paid on a DSCR loan in Arizona is tax-deductible, potentially reducing the investor’s overall tax liability. Other tax incentives may also follow.

Loan Amounts

Investors can access generous loan amounts compared to traditional mortgages. The loan amount can range from a minimum of $75k to a maximum of $2 million.

DSCR Loan Requirements in Arizona

Investors must satisfy specific DSCR loan qualifications. Although the conditions can differ based on 

Credit Score

A strong credit score proves the borrower’s ability to manage their debt responsibly. Investors can expect to satisfy a score of 680 or greater credit score.

Debt-to-income Ratio Threshold

The debt-to-income ratio is an essential qualification. It indicates the investment’s financial health and ability to service debt. 

Lenders explicitly specify the required ratio. Typically, a ratio of 1.0 suffices to demonstrate the investor’s rental income exceeds their annual debt. 

The minimum ratio in Arizona is 1.25. A ratio of 2 is highly attractive for lenders, showing that the property generates cash flow that is two times the monthly loan payments (principal and interest payments).

Cash Flow History

Lenders can require borrowers to provide a history of financial statements—usually the previous 2 to 3 years—for the property. Historical cash flow acts as a measure of the property's economic health.

Property Appraisal

A professional property valuation and appraisal determines the property’s current market value. It is to verify that the property provides sufficient collateral before the loan is furnished. Property appraisals offer lenders confidence, increasing the chances of a better loan amount.

Loan-To-Value Ratio

Loan-to-Value ratio (LTV) can be crucial in deciding whether lenders approve your rental investment loan. 

LTV measures the ratio between the amount of debt used to purchase a property and its value. A general rule is to have LTVs no greater than 80%. LTVs at or below 80% can result in favorable interest terms and percentages for borrowers.

Type of Property

The type of investment property borrowers wish to acquire a DSCR loan for is essential. The type of property, whether

  • Single-family homes 
  • Multi-family units 
  • Commercial real estate

influences the loan terms. 

Some loans may have stricter requirements if the lender perceives the specific property type as risky.

Guarantees

Property lenders can require guarantees to establish the debt repayment. 

This renders lenders more confident. Guarantors can be personal or commercial parties. 

Future Projections

Lenders can ask borrowers to demonstrate an ability to maintain their debt-service coverage ratio through future business plans. The projections must be reasonable and realistically possible.

How To Get A DSCR Loan in Arizona

  1. Complete the Loan Application with Your Chosen Lender. 

This includes

  • Investment Property’s Appraisal
  • Credit Score Evaluation
  • Proving Real Estate Investment Experience
  1. Calculate Your Debt Service Coverage Ratio
  2. Finalize Your Interest Rate
  3. Loan Approval
  4. Loan Funding 

Improving Your Chances Of Getting Approved

Investors can take additional steps to increase their probability of approval.              

Have A Solid Business Plan

Perfecting your business plan can strongly convince lenders. Lenders look for a well-defined investment strategy to prove the investor's ability to maintain their DSCR. It’s important to provide a clear, detailed account of how the loan will be utilized to generate healthy cash flow from the property. 

Lenders scrutinize the following:

  • Goals 
  • Risk tolerance 
  • Target market 
  • Exit plan

The projected cash flow must be sustainable and consistently positive. Investors can also include details of monitoring and analyzing the cash flow in response to fluctuating market conditions.

Financial Statements

Ensuring organized and detailed documents is key. This maximizes the chances of loan approval. Financial statements must display higher income and lower debt levels. 

Increase your income by:

  • Adding extra income revenue streams
  • Optimizing existing business

A property’s stable income and manageable debt levels will convince leaders. 

Avoid Inaccurate Documentation

In preparing your documentation for a DSCR loan application, avoid these common pitfalls that result in rejection.

  • Providing incomplete and inaccurate information
  • Failing to disclose debts
  • Submitting outdated financial statements 

Work with an Experienced Lender

DSCR loans are more complex than traditional loans, and not all lenders offer them. Working with an experienced lender who understands the process and can guide you accurately is important.

Look for a lender with a strong track record in DSCR lending. They can provide personalized service and work with you to address issues that may arise during the process.

Types Of Properties Eligible for DSCR Loan in Arizona

Properties eligible for a loan in Arizona include commercial and investment properties. These loans are only granted to non-owner occupied properties.

These include 

  • Single-family (1-4 unit) residential investment properties
  • Multi-family investment properties like duplexes, apartments, etc.
  • Mixed-use residential investment properties
  • Short-term or vacation rental properties (example: Airbnb)
  • Commercial Properties (retail spaces, office buildings, warehouses, and industrial properties.) 

Finding The Right Lender for a DSCR Loan in Arizona

Prioritize lenders with expertise and specialization in this specific financing option. Finding lenders within your industry or property type is best. Such lenders can understand and cater to investors' unique financing needs. 

Look for lenders with a proven track record in providing DSCR loans for real estate investors. 

Reputation

Research the lender's reputation thoroughly. Read reviews online and seek recommendations from fellow investors.

You can get valuable insights into the lender's reliability and quality of service. Positive feedback from previous clients will help make an informed decision about financing partners.

Communication

Effective communication directs your loan process. Choose attentive and responsive lenders. The right lender streamlines the loan process, addresses inquiries promptly, and supports investors.

Loan Terms

Every lender has distinct requirements, from fixed rates to adjustable-rate mortgages, with their rate structures. Borrowers should find a lender whose requirements and offerings align with their financial goals and investment strategy.

Evaluate the terms offered like:

  • Interest rates
  • Loan duration
  • Flexibility
  • Origination Fees Closing 
  • Serving Costs
  • Terms and Conditions

Additional Considerations for Arizona Investors

Managing A DSCR loan in Arizona

Make timely payments to ensure your credit score remains strong. This can persuade lenders to finalize the loan. 

Credit Report

Personal credit isn’t a key factor, but lenders can review your credit report to determine your creditworthiness and financial stability. 

Maintaining A Good Credit Score

  • Improve your chances of approval by making timely payments
  • Reduce outstanding debt 
  • Avoid new credit inquiries that lower your score

A solid credit history significantly enhances your financial profile and increases your likelihood of approval.  

Conclusion

A DSCR loan empowers investors to obtain flexible financing for rental investments based on the property’s cash flow generation rather than the borrower’s personal income. New investors seeking quick and low-effort terms in Arizona's real estate market can maximize their profits.

The right lenders in Arizona will structure your loan terms to complete your deal and ensure you're positioned to continue growing your rental portfolio. 

Our group of financial advisors at Truss Financial Group can help you snag lucrative properties in Arizona and connect you with the right lender.  

Contact us today for a consultation.

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