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DSCR Loans Texas


Last updated: March 18, 2023


You deserve the best DSCR loans Texas has to offer. Let's review the merits of DSCR loans to finance rental properties in the Lone Star State, how you can use them to grow your Texas rental property portfolio, and how to choose the right DSCR lender.




DSCR Loan Texas


DSCR loans are mortgages for rental properties. DSCR stands for debt service coverage ratio, a simple cash flow metric that indicates whether a rental property can sufficiently cover its mortgage payment. A DSCR of 1.0 means the property is at cash flow breakeven which a DSCR above 1.0 means the property more than covers its mortgage payment. A DSCR below 1.0 means the property does not generate enough income to cover its mortgage payment and therefore the owner must contribute additional cash on a monthly basis or raise rent.


As interest rates rise and remain elevated, rental properties in Texas continue to be an attractive investment for investors seeking cash flow and appreciation. All else equal, the higher the interest rate, the lower the DSCR. During periods of elevated interest rates, it's important to invest in rental properties that generate strong rents relative to as is value. This is similar to the 1% rule -- a popular concept among rental property investors that encourages screening for deals where rents will be 1% or more of the cost basis of the property (purchase price, closing costs and rehab). Properties too far below 1% may not generate enough income to cover the mortgage at your target LTV (DSCR is too low). When DSCR is too low at your target LTV, you will need to accept a lower LTV which means you'll need to have a higher down payment. Even if a higher down payment is feasible, it is certainly not ideal if you're focused on optimizing your cash on cash returns.


DSCR Loan Requirements


OfferMarket Other Texas DSCR Lenders
Interest Rate Get Instant Quote Get Instant Quote
LTV Purchase 80% 75%
LTV Rate and Term Refi 80% 75%
LTV Cash Out Refi 75% 70%
Minimum DSCR 1.1 1.2
Minimum Credit Score 660 680
Borrower Experience 0+ 1+
Appraisal Direct (save $250) AMC (waste $250)
Seasoning None 6 Months
Origination Fee 0.5% to 1% 2% to 3%
Junk Fees None Common
Time To Close 15 - 25 Days 30 - 60 Days
Quoting Instant Slow
Pre-Approval Letter Instant Slow
Processing Online, Fast Manual, Slow

DSCR Loan Calculator


In order to calculate the loan amount that your rental property purchase or refinance will qualify for, we recommend using a DSCR calculator. It's important to understand the inputs that lenders use to calculate DSCR, this way you can screen investment opportunities and set proper expectations regarding loan-to-value, cash to close and cash on cash returns.


Purchase Price or As Is Value


For purchase transactions, the DSCR calculation uses the lower of the purchase price or As Is value from the appraisal report. For refis, the As Is value from the appraisal report is used. The higher the As Is value, the greater the chance that DSCR will not support maximum LTV. For example, let's say you used the BRRR method on a rental property in Shaker Heights, OH. After your rehab you get the property leased for $2,000 and then the property appraises for $290,000 with a market rent of $1,900. Ultimately, with interest rates elevated, the rental income is only enough to cover closer to 65% LTV than the 75% LTV maximum for cash out refi.


Rents


Most DSCR lenders take the lower of actual in place rent and market rent opinion in your appraisal report. This is why it is critically important keep your lease agreements as close to market rent as possible, and to work with a lender that orders appraisals with appraisers who are experts in rental properties in the local market. If the property is vacant, the market rent opinion from the appraisal will serve as the input for the DSCR calculation.


Texas Property Tax Rate


The higher the property tax rate, as verified by the most recent tax bill for the subject property, the lower the DSCR. At 1.6%, Texas property tax rate is higher than the national average of 1%. We recommend using a DSCR calculator to understand how property taxes may limit your LTV. If you're a BRRR investor, you don't need to worry as much about property tax rate because the distressed property you rehabbed and are now refinancing likely still has a low property tax rate.


Property Management


While property management is a very real expense that eats into your Net Operating Income, the numerator of the DSCR formula, many lenders do not include property management in their DSCR calculation. If you are not sure if you will use a property management company, to ensure you get the highest possible loan amount, it's best to self manage initially and make that final decision after your DSCR loan is originated.


Utilities


If your tenants are not paying utilities, your DSCR calculation will include utilities as an expense that reduces Net Operating Income and therefore DSCR. We recommend always having your tenants pay all utilities.


Maintenance


Some DSCR lenders include a specific maintenance amount in your DSCR calculation. This may be a $500 or $1,000 annual expense that will reduce your DSCR slightly.


DSCR Loan Interest Rates


DSCR loan interest rates are historically highly competitive with conventional loans for investment properties, and bank loans. During times of economic uncertainty, the DSCR market can become volatile as credit investors including life insurance companies, pension funds, mortgage REITs pause purchases or demand higher interest rates to compensate for an increase in perceived risk. During these times, the firms that aggregate DSCR loans for securitization may demand a higher yield. Ultimately


DSCR Loan Down Payment


For purchases, the lowest down payment available among leading DSCR loan programs is 20% (80% LTV). Many rental property investors look for 85% LTV and we urge you to be cautious if a lender tells you they can provide 85% LTV.


DSCR lenders do a liquidity verification and request up to three months of bank statements. You can use brokerage accounts and retirements accounts as well to confirm you have enough funds to cover your down payment, closing costs and have a healthy buffer in case your tenant is vacant or an eviction is required.


DSCR Loan Credit Score


DSCR loans are highly sensitive to borrower credit score. The minimum credit score requirement to qualify for a DSCR loan is 660. The lower the credit score, the lower your LTV and higher your interest rate. Most lenders require a credit score of 720 and higher in order to qualify for the highest LTV that your DSCR supports.


Most DSCR loan program guidelines require a tri merge report which is a hard pull for all three credit bureaus (Experien, Transunion and Equifax). The highest and lowest scores are ignored and the middle score use used.


DSCR Loan Prepayment Penalty


DSCR loans in Texas, just like the rest of the U.S., typically have a prepayment penalty. The 3 year, 3-2-1, and the 5 year, 5-4-3-2-1, are the most common options. Learn more about the concept of a prepayment penalty.


DSCR Minimum Loan Amount


Most DSCR lenders have a minimum loan amount of $75,000. Our minimum loan amount is currently $65,000 for a single property loan and $50,000 for a portfolio loan of 2 or more properties.


DSCR Portfolio Loan Texas


If you are buying or refinancing 2 or more rental properties in Texas, you can use a DSCR portfolio loan. During periods of market volatility, DSCR portfolio loans may carry a slightly higher interest rate and a slightly lower LTV. If your total portfolio loan amount is high enough, you may be able to qualify for a lower minimum loan and As Is value for individual properties within the portfolio.


Best Texas Markets For DSCR Loans


Due to DSCR loan program guidelines, because the majority of DSCR loans are pooled into securitizations, your rental property cannot be considered "rural". That can be an issue in Texas because much of the state is considered rural.


While the definition of rural varies by lender, the appraisal report cannot be marked as "rural" -- it would need to be marked "suburban" instead. Even if the property is marked as "suburban" on the appraisal report, the lender may deem the property to be rural if it shows as rural on the CFPB Rural and Underserved Areas Tool, if the local population is below 20,000, or if a simple Google Maps view shows the property is in an area with limited infrastructure -- schools, hospitals, places of worship, grocery stores -- and far from other population centers (in other words, the middle of nowhere).


These are the best rental markets in Texas if you want to use a DSCR loan:


City Population (2023) County
Houston 2,350,000 Harris County
San Antonio 1,450,000 Bexar County
Dallas 1,340,000 Dallas County
Austin 1,015,000 Travis County
Fort Worth 975,000 Tarrant County
El Paso 690,000 El Paso County
Arlington 403,000 Tarrant County
Corpus Christi 322,000 Nueces County
Plano 293,189 Collin County, Denton County
Irving 269,000 Dallas County
Lubbock 265,000 Lubbock County
Laredo 261,000 Webb County
Garland 252,000 Dallas County
Frisco 226,000 Collin County, Denton County
McKinney 215,000 Collin County
Amarillo 203,000 Potter County
Grand Prairie 202,000 Dallas County, Tarrant County, Ellis County
Brownsville 190,000 Cameron County
Killeen 161,000 Bell County
Mesquite 153,000 Dallas County
Pasadena 153,000 Harris County
Denton 148,000 Denton County
McAllen 146,000 Hidalgo County
Waco 142,500 McLennan County
Midland 139,000 Midland County
Carrollton 138,000 Dallas County, Denton County, Collin County
Pearland 136,000 Brazoria County
College Station 128,500 Brazos County
Abilene 128,000 Taylor County
Richardson 125,500 Dallas County, Collin County
Round Rock 125,300 Williamson County
League City 123,600 Galveston County
Sugar Land 120,600 Fort Bend County
The Woodlands 120,600 Montgomery County, Harris County
Odessa 118,700 Ector County
Lewisville 116,700 Denton County
Beaumont 114,300 Jefferson County
Allen 110,800 Collin County
Tyler 108,700 Smith County
Edinburg 107,190 Hidalgo County
San Angelo 101,900 Tom Green County
Wichita Falls 101,600 Wichita County
New Braunfels 100,200 Comal County
Conroe 100,000 Montgomery County
Atascocita 95,000 Harris County
Mission 88,000 Hidalgo County
Baytown 87,250 Harris County, Chambers County
Temple 86,800 Bell County
Bryan 86,300 Brazos County
Cedar Park 86,200 Williamson County, โ€ŽTravis County
Pharr 82,500 Hidalgo County
Longview 82,000 Gregg County
Flower Mound 79,400 Denton County
Mansfield 77,500 Tarrant county
Missouri City 76,300 Fort Bend County
San Marcos 74,300 Hays County
Harlingen 73,900 Cameron County
Georgetown 73,100 Williamson County
North Richland Hills 71,900 Tarrant County
Pflugerville 70,700 Travis County
Leander 69,000 Williamson County, Travis County
Victoria 66,400 Victoria County
Spring 65,100 Harris County
Rowlett 64,400 Dallas County, Rockwall County
Euless 64,000 Tarrant County
Wylie 62,300 Collin County
DeSoto 58,300 Dallas County
Port Arthur 56,700 Jefferson County
Galveston 55,500 Galveston County
Texas City 54,000 Galveston County
Little Elm 52,600 Denton County
Grapevine 51,900 Tarrant County
Kyle 51,000 Hays County
Burleson 50,900 Johnson County, Tarrant County
Bedford 50,800 Tarrant County
Cedar Hill 50,400 Dallas County, Ellis County
Rockwall 50,200 Rockwall County
Huntsville 48,150 Walker County
Channelview 47,900 Harris County
Keller 47,600 Tarrant County
Haltom City 47,200 Tarrant County
The Colony 47,000 Denton County
Sherman 45,100 Grayson County

DSCR Lenders Texas


You have many choices when it comes to selecting a DSCR lender in Texas. At OfferMarket, our mission is to help you build wealth through real estate. We accomplish this mission by providing you with the best possible terms, every single quote, every single loan, every single time.


๐Ÿ“‰ Lower interest rates
๐Ÿ’ธ Lower origination fee
๐Ÿ’ฐ Higher LTV
๐Ÿ›Ž๏ธ Better service
๐Ÿ‘จโ€๐Ÿ’ป Better technology
โšก Faster time to close
๐Ÿ“… No seasoning


How to apply for a DSCR loan


Applying for a DSCR loan has never been easier. Submit our DSCR loan application for an instant quote and download your pre approval letter in minutes. We do not pull your credit when you submit your application, that is only done once you e-sign our credit release authorization, a later step in our processing once you confirm your intent to proceed with OfferMarket as your DSCR lender.


See how much you qualify for, get your instant DSCR loan quote today!

DSCR calculator (Will it cash flow?)