DSCR Loan Michigan

Last updated: November 21, 2024

When it comes to investing in real estate, especially in a state as vibrant and diverse as Michigan, financing options are a key consideration. The now go-to choice among rental property investors of all experience levels is the DSCR loan. But what is a DSCR loan, and why is it a good fit for investors in Michigan? This comprehensive guide will explore the ins-and-outs of DSCR loans in Michigan, including their benefits, eligibility criteria, and how to make the most of this unique financing option.

What Is a DSCR Loan?

A DSCR loan, or Debt Service Coverage Ratio loan, is a type of real estate financing tailored for investors. Unlike traditional loans that rely heavily on the borrower’s personal income and financial history, DSCR loans assess the property’s income-generating potential to determine eligibility.

In simple terms, lenders use the Debt Service Coverage Ratio to measure whether the income generated by a property is sufficient to cover its debt obligations. This metric is particularly useful for real estate investors who prioritize cash flow and rental income over personal earnings.

Why Choose a DSCR Loan in Michigan?

Michigan’s real estate market offers an array of opportunities, from urban developments in Detroit to vacation rentals along the shores of the Great Lakes. DSCR loans are especially appealing for investors in Michigan for several reasons:

Focus on Property Income

Michigan is known for its diverse real estate landscape, including rental properties, multifamily units, and short-term vacation homes. DSCR loans emphasize the cash flow of the property, making them ideal for such investments.

Flexibility for Investors

DSCR loans cater to experienced and new investors alike. Whether you’re purchasing your first rental property or expanding a portfolio, this loan type offers flexibility without strict personal income requirements.

Is Michigan a good market for DSCR loans?

Michigan is an ideal market for DSCR loans for purchase and refinance because properties in Michigan tend to have high rent relative to As Is value and therefore deliver strong cash flow (DSCR is a fancy way of measuring cash flow...).

Expanding Markets

Michigan has several emerging markets where real estate values and rental demand are on the rise. Investors can capitalize on these trends with financing that prioritizes property performance.

Some of the markets we are most excited about:

No Income Verification

For self-employed individuals or those with fluctuating personal income, DSCR loans provide an accessible path to property investment without the hassle of traditional income verification.

How does the DSCR ratio work?

The Debt Service Coverage Ratio (DSCR) is a simple calculation that determines whether a property’s income can cover its debts. The formula is:

DSCR = Rent ÷ PITIA

PITIA is the total monthly payment which includes principal + interest + taxes + insurance + association dues (if applicable). PITIA is often referred to as your debt service -- the cost to service the loan to avoid default and foreclosure.

Michigan DSCR Loan Example

We recently funded a single family rental property in Detroit, MI. Let's take a closer look at the numbers:

• Transaction type: cash out refinance
• Borrowing entity: LLC
• Guarantor credit score: 730
• Property type: single family (1 unit)
• As Is value: $158,000
• Loan amount: $118,500
• Interest rate: 6.87%
• Structure: 30 year term, full amortization, fixed rate
• Principal and Interest (monthly): $778.06
• Insurance (monthly): $117.54
• Taxes (monthly): $66.78
• HOA (monthly): $0.00
• PITIA: $962.39
• Rent: $1,400
• DSCR: 1.4547

For a cash out refinance (cash to borrower on the settlement statement is $2,000+), the maximum LTV is 75%. As you can see, from the actual example, the borrower is generating $437.61 in free cash flow ($1,400 - $962.39).

The minimum DSCR in our DSCR loan program is 1.0, so technically the borrower would have qualified for 75% LTV even if the subject property's monthly rent was $962.39. This being said, we strongly prefer a minimum DSCR of 1.1 (market rent of $1058.63) to ensure you have a buffer of free cash flow to be able to build up reserves to pay for inevitable items including maintenance, vacancy, insurance premium increases and tax increases. Over time, as you increase your monthly rent, your DSCR should increase as long as it more than offsets any increases in your taxes and insurance.

A DSCR of 1.25 means the property earns 25% more income than is needed to cover its mortgage payment, which is considered strong by most lenders.

Benefits of DSCR Loans in Michigan

DSCR loans offer a range of benefits that make them an attractive option for real estate investors. Here are some key advantages:

Simplified Qualification Process

Unlike traditional loans, DSCR loans don’t require detailed income documentation or personal tax returns. Lenders primarily evaluate the property’s income, making the process faster and less cumbersome.

Higher Loan Limits

DSCR loans often offer higher borrowing limits (LTV) than conventional loans and bank loans, which is advantageous for investors looking to minimize down payment for purchase transactions and maximize cash out for refinance transactions.

No Personal Income Restrictions

Self-employed investors or those with non-traditional income streams often struggle with conventional and bank financing which typically require income verification, tax returns, and employment verification. DSCR loans eliminate this barrier, focusing instead on property income. DSCR loans are perfect for self-employed and full-time rental property investors.

Diverse Property Types

From single-family rentals in suburban areas to multifamily units in Michigan’s urban centers, DSCR loans accommodate various property types. At OfferMarket, we specialize in DSCR loans for 1-4 unit residential properties. We can also fund DSCR loans for mixed use properties of 4 units or less as long as 50% or more of the Sq Ft is residential.

Portfolio Growth

DSCR loans allow investors to finance multiple properties simultaneously, enabling faster portfolio growth.

Eligibility Requirements for a DSCR Loan in Michigan

While DSCR loan guidelines vary, borrowers must still meet specific criteria to qualify. Here are the typical requirements:

Minimum DSCR

Most lenders require a minimum DSCR, often ranging from 1.0 to 1.20. This ensures the property generates enough income to cover its debt.

Credit Score

Borrowers typically need a credit score of at least 660, though some capital providers may have higher requirements.

Down Payment

DSCR loans usually require a down payment of 20-25%, depending on guarantor credit score. If credit score is 700+ then you will be eligible for 20% down payment (80% LTV) as long as the DSCR is not below the minimum at this target loan amount.

Property Income

The property must demonstrate consistent income potential through leases, rental history, or market analysis.

Property Appraisal

DSCR Lenders will require a professional appraisal to verify the property’s value and income potential.

Michigan Real Estate Market Trends and Opportunities

Michigan’s real estate market has unique characteristics that make it a compelling place for investment. Here are some trends to consider:

Affordable Property Prices

Compared to national averages, Michigan offers relatively affordable real estate, making it an attractive option for investors seeking high returns.

Growing Rental Demand

Cities like Detroit, Grand Rapids, and Ann Arbor are experiencing increasing demand for rental properties due to growing populations and employment opportunities.

Vacation Rental Hotspots

Michigan’s picturesque locations, such as Traverse City and the Upper Peninsula, are ideal for short-term vacation rentals. DSCR loans are available for financing these types of properties, even in rural markets.

Urban Revitalization

Ongoing redevelopment in cities like Detroit presents opportunities for investors to acquire and renovate properties for higher returns.

Steps to Obtain a DSCR Loan in Michigan

If you’re ready to explore DSCR loans in Michigan, follow these steps to streamline the process:

Research Lenders

Identify lenders specializing in DSCR loans and compare their terms, rates, and requirements.

Analyze Property Income

Calculate the expected DSCR for your target property to ensure it meets the lender’s criteria.

Prepare Documentation

Gather necessary documents, such as property appraisals, rental agreements, and operating expense reports.

Submit Loan Application

Complete the lender’s application process, providing all requested information about the property and its income potential.

Close the Loan

Once approved, finalize the loan agreement and prepare for closing.

Tips for Maximizing DSCR Loan Benefits in Michigan

To make the most of your DSCR loan, keep the following tips in mind:

Invest in High-Demand Areas

Focus on Michigan markets with strong rental demand and growth potential, such as Detroit, Ann Arbor, Grand Rapids and the cities referenced in the table above. At OfferMarket, we advise our clients to buy in the path of progress. Markets that are rebounding, sprawling and growing are ideal starting points for your rental property market research.

Optimize Property Income

Ensure your property is well-maintained and marketed to attract quality tenants and maximize rental income.

Work with Experienced Professionals

Collaborate with local real estate agents, property managers, and lenders familiar with Michigan’s market dynamics.

Monitor Market Trends

Stay informed about local real estate trends to identify new opportunities and adjust your investment strategy.

Consider Future Refinancing

If property values increase, refinancing your DSCR loan can help you access additional capital for new investments.

Summary

A DSCR loan in Michigan is an excellent financing option for real estate investors looking to capitalize on the broad array of rental investing opportunities in the state. By focusing on property income rather than personal income, DSCR loans provide flexibility, accessibility, and growth potential. Whether you’re investing in urban rentals or vacation properties, understanding how DSCR loans work will set you on a patch to success as your grow your rental portfolio.

Ready to take the next step? Get your instant quote from OfferMarket today!