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DSCR Mortgage Loans Colorado 2024 | Everything You Need To Know

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Investing in real estate in Colorado is a great long-term wealth strategy. Colorado DSCR mortgages are designed especially for new and seasoned investors, giving borrowers competitive rates and terms. 

Not only are these loans more readily available, but they also provide more significant benefits over a regular mortgage. If you’re considering investing in rental properties but can’t secure a loan, here’s all you need to know about Colorado DSCR loans.

What are DCSR Loans

Unlike conventional Colorado home loans, DSCR (Debt Service Coverage Ratio) loans measure a borrower's ability to repay a loan based on their cash flow. This determines whether or not that individual is eligible for a loan. 

DSCR loans are designed to serve real estate investors. With this type of loan, the monthly payments can fluctuate based on the property's cash flow.

If you’re making enough rental income to pay your monthly mortgage, you can typically qualify for Colorado debt service coverage ratio loans. 

How Is DSCR Calculated

Before you can qualify for a DSCR loan, lenders will have to calculate your DSCR. The critical factors in calculating DSCR are the net operating income (NOI) and debt service payments. A DSCR of 1 or above indicates sufficient income to cover debt obligations.

Here’s how you can calculate it yourself:

  1. Start with your gross rental income, determined based on your lease agreement. Alternatively, you can use 12 months of rental income history.
  2. After that, figure out your annual debt. This means you must examine the principal, interest, taxes, insurance, and HOA payments (if applicable). Combine these yearly numbers to determine how much you must make on time for loan, insurance, and HOA payments (if applicable).
  3. Lastly, take your annual gross rental income and divide it by your annual debt to calculate your DSCR. If the numbers are equal, you have a DSCR of 1.

Let's take an actual example. Suppose you have a gross rental income of $95,000, but your annual debt is only $50,000. All you have to do is divide $95,000 by $50,000, which gives you a DSCR of 1.9.

Eligible Properties In Colorado

Colorado's booming real estate market, particularly in cities like Denver and Boulder, makes these loans attractive for investors looking to utilize the high demand.

DSCR loans are typically available for commercial real estate and investment properties, including multi-family units, office buildings, and retail spaces. 

Benefits Of Investing In Colorado

Powerful Economy 

Colorado is an economic powerhouse thanks to its diverse economy. Though growth is expected to slow in 2024, its current growth exceeds the national average.

DSCR loans enable real estate investors to take advantage of Colorado's booming economy by purchasing short-term rental properties or office buildings.

Population Growth

Colorado's growing population needs housing, making it an ideal residential investment opportunity. The World Population Review declared Colorado the second-fastest-growing state in the US.


Over 34% of Colorado residents are renters; if real estate investors can strike the right balance between purchase price and rent, they can easily earn excellent rental income from residential tenants. 

Faster Processing Time

DSCR loans have a streamlined and quick application procedure that does not require the provision of personal financial information. Because they don’t evaluate personal finances, they’re more accessible to borrowers without considerable savings or other assets.

Lower Interest Rates

The current DSCR average loan rate is between 7.20% and 8.57% for loans with a 25% down payment and a DSCR of 1.2.

Requirements

No matter what kind of loan you’re applying for, there are certain requirements you must meet. Here’s how to qualify for a DSCR loan in Colorado’s competitive market.

DSCR 

The primary requirement is a good DSCR. The minimum is generally considered to be a ratio of 1. However, lenders prefer seeing that the property's rental income exceeds the debt obligations, so they want a higher DSCR of 1.2 or more. Hence, you should consider boosting the property's net operating income.

Credit Score

Lenders examine your credit score since you must provide details about your finances, like tax returns or debt-to-income ratio. Many lenders accept a minimum credit score of just 680. So, DSCR loans are a good option for self-employed borrowers whose job history may lead to a lower credit score.

Although, your opportunity to secure lower interest rates rises if you have a higher credit score. 

Property Appraisal 

Before loan approval, the rental property must undergo an appraisal to determine whether the property value matches the loan amount. If the property has had previous tenants, you can expect to submit lease agreements and other documents proving its cash flow.

LTV 

The loan-to-value ratio determines your borrowing amount and indicates your down payment requirements. Typically, you'll need a loan-to-value ratio of 80% or less, meaning you will need at least a 20% down payment.

Down Payment

Because DSCR loans are a higher risk for lenders, these mortgages have stricter down payment requirements than traditional loans. 

Generally, at least a 20% down payment is required, though many lenders even need 25% or more. You will also have to provide funds for closing costs, as is the case with other loans.

Application Tips For Colorado Borrowers

Preparing a successful DSCR loan application involves outlining Colorado-specific market trends and rental income potential. Other than that, the following tips can help bolster your application.

Solid Business Plan

Have a clear and well-defined investment strategy. Your strategy should include 

your aims like:

  • target market
  • risk tolerance 
  • exit plan

It’s important to demonstrate strong cash flow management in your business plan. Lenders wish to see consistent and sustainable cash flow to ensure that you can meet your debt obligations. 

You can include:

  1. Detailed financial projections
  2. A comprehensive budget
  3. Contingency plans for any unexpected expenses

This proves your ability to manage your finances and repay the loan effectively. Strong cash flow management instills confidence in lenders, improving your chances of securing a DSCR loan.

Accurate Documentation

The success of your DSCR loan application largely depends on accurate, organized, and comprehensive monetary statements. Ensure you have gathered your 

  • Financial statements
  • Tax returns 
  • Bank statements
  • Any other relevant documents that showcase your income and assets 

Documentation Mistakes to Avoid

When preparing your documentation for a DSCR loan application, it’s crucial to avoid common pitfalls that cause rejection. This includes

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

Improving Your DSCR

Enhancing your ratio can be achieved by the following strategies.

1. Increase Your Revenue, Decrease Your Expenses

This sounds obvious, but your ratio measures your ability to service your debt. Increasing your revenue without increasing your expenses will help.

2. Renegotiate Your Debt Terms

If it’s possible for you to get a lower interest rate or extend the term of your loan, you can reduce your debt service requirements and improve your DSCR ratio.

3. Increase Collateral’s Value

If the value of your property increases, you will have more equity to cover any potential losses. This way, your DSCR ratio will improve.

The ground rule remains the same: improving your DSCR ratio is all about increasing your ability to service your debt.

Potential Risks Of DSCR Loans Colorado

The dynamic nature of Colorado's real estate market means that economic shifts could affect rental income and property values. Borrowers must be aware of multiple risks before taking out DSCR loans.

Fluctuating Interest Rates 

Borrowers may be startled by abrupt interest rate adjustments. These adjustments can affect their DSCR by increasing debt service costs, making it more difficult to maintain a healthy DSCR. 

If your DSCR loan has a variable interest rate, you may be at greater risk of fluctuations in interest rates, leading to higher debt service costs over time.

Market Risk 

Real estate investments funded through DSCR loans are subject to market fluctuations. Property values can drop, impacting the value of your collateral.

Potential Cash Flow Issues

Unforeseen expenses can damage a borrower’s cash flow, potentially harming a healthy DSCR. These expenses put pressure on debt service, making it challenging to make loan payments or even default consistently.

Should your cash flow decline drastically or your investments underperform, you may need help to meet the DSCR requirements, increasing the risk of loan default and potential collateral loss.

Potential Loss of Assets

In the worst-case scenario, defaulting on a DSCR loan can result in the lender seizing and selling the collateral to recover their investment, potentially resulting in the loss of valuable assets.

Conclusion

Proper knowledge of DSCR loans and adequate preparation can help investors maximize the advantages while mitigating potential downsides. 

So, if you’re interested in taking advantage of Colorado’s rental market and are ready to take the next step in your investment property journey, contact us. We’ll help you find the perfect loan for your needs.

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