Georgia has numerous appealing markets for real estate investors. Owning investment properties can be a path to greater wealth and financial freedom. Unfortunately, many potential investors are kept out of the industry by intimidating home prices and the upfront costs.
Depending on your financial situation, there are two primary options to borrow money and purchase an investment property: debt-service coverage ratio (DSCR) loans and conventional loans.
DSCR loans are designed for investment properties and focus on the property’s cash flow instead of the borrower’s personal income for approval. Conventional mortgages typically offer lower down payments and interest rates, making them slightly more attainable.
Each mortgage loan has unique features that can make it easier for investors to enter the Georgia real estate market. Let’s discuss the differences and advantages of these two loan programs, including the down payment, income verification, private mortgage insurance, and more.
What is a DSCR Loan?
A debt-service coverage ratio loan is a mortgage product built for investors. Utilizing these loans is a common investment strategy. While most mortgage products require verification of the borrower’s personal income for approval, DSCR loans are based on the property’s income and its ability to cover debt obligations.
The primary metric involved in this process is the debt-service coverage ratio. You can calculate DSCR for a property by dividing its net operating income by the total annual debt service. A rental property with strong cash flow is more likely to have a higher DSCR.
The DSCR loan program is extremely popular for Georgia investors. It allows them to scale their portfolios quickly and take advantage of profitable properties to seek financing. Even if your income is complex, a DSCR loan focuses on the property’s ability to generate revenue.
What is a Conventional Loan?
A conventional loan is a more basic mortgage product that can be used to buy primary residences or investment properties. Approval and mortgage payments are based on the borrower’s personal financial situation rather than the property’s current cash flow. Therefore, conventional financing lenders will verify your income, credit score, and economic stability. This makes conventional loans ideal for traditional property purchases.
A conventional loan could be used to purchase a rental property, but it is not tailor-made for investors. Borrowers who want lower interest rates and more minor down payment requirements could benefit from conventional mortgages when purchasing investment properties.
Key Differences Between DSCR and Conventional Loans in Georgia
When comparing a DSCR loan vs conventional financing, borrowers must understand the differences between these two programs. It also depends on the borrower’s financial situation and their individual needs. The significant differences relate to income verification, the loan approval process, and property eligibility. Let’s look at these elements closely.
Income Requirements
There is income verification required for both loans. A DSCR loan is approved based on the income generated by the property. Net operating income is calculated by subtracting all property expenses from the total rental income. When you divide this number by the total debt service for the year, you get the DSCR. Most private lenders will require a minimum DSCR of 1.25, though these limits can vary.
On the other hand, conventional mortgages will be approved based on the borrower’s income. You have a more substantial chance of approval if you are employed and make enough money to cover new debt payments comfortably. Income and employment verification will require documentation, such as tax returns, W-2s, paychecks, and bank statements, to prove you have a stable income.
Regarding conventional loans, you may have a higher down payment depending on your income and credit score. Conventional loans are often compatible with loans backed by the federal government, such as USDA and FHA loans. These loans may have additional income criteria or prepayment penalties.
Credit Score Requirements
Your credit history impacts your ability to borrow both DSCR and conventional mortgages. A relatively good credit score, such as 620, may be enough to secure a DSCR loan. Conventional lenders seek higher credit scores for rental property purchases, such as 650-700. Variations in the credit score requirement are normal, especially when lenders look at property types, the location, and your down payment.
Property Eligibility in Georgia
When choosing between a DSCR loan vs conventional financing, you must also consider the type of property you are buying. A DSCR loan works better for real estate investors because it focuses on the income generated by the property and the debt-to-income ratio. Conventional loan products are typically suited to primary residences.
DSCR loans usually work better for investing because DSCR loans typically have more flexible loan terms, so you can use lease payments to make mortgage payments. You can also utilize more than one DSCR loan to help build your property portfolio. This is a standard tool in the mortgage industry to generate income.
However, both loans can be used for various property types. A person who doesn’t meet the debt-to-income ratio requirements for a DSCR loan but has stable income may use a conventional loan for an investment property. A financial advisor can help you determine the best solution for your situation.
Benefits of DSCR Loans for Georgia Real Estate Investors
Using a DSCR loan to purchase a rental property comes with several benefits. You won’t have to worry about personal income verification yourself. Instead, the property’s cash flow will play the most significant role in approval.
DSCR loans provide flexibility to investors so they can purchase multiple properties. A DSCR loan makes it easier to acquire high-cash-flow properties in Georgia. A professional lender can help you weigh the pros and cons to make an informed decision.
Benefits of Conventional Loans for Georgia Homebuyers
If you use a conventional loan to purchase an investment property in Georgia, there are a few advantages. First, you can acquire lower interest rates and favorable terms if your finances are strong. You could also use a conventional loan to purchase a primary residence and turn part of it into a rental. Lower-risk investments may not require as much money as most DSCR purchases, so conventional mortgages can work in these situations.
When to Choose a DSCR Loan in Georgia
The DSCR loan vs conventional mortgage debate can be settled by understanding your specific needs. A DSCR loan is best if you need to purchase a more expensive property, such as a rental in Atlanta. It also makes sense to use DSCR loans if you are expanding your portfolio with highly profitable properties.
When to Choose a Conventional Loan in Georgia?
Using a conventional loan is a great way to get started with real estate investing. If you are looking for your first investment property and have a strong financial background, a conventional loan can save you money and mitigate some of the risks of investing. Additionally, if you want to buy a primary residence that may also serve tenants in the future, you will need a conventional mortgage.
The Role of Georgia’s Real Estate Market in Loan Selection
Georgia features many diverse housing markets. Bustling cities like Atlanta and Savannah will fetch higher home prices, no matter what type of rental you buy. More suburban and rural areas may have less demand for rentals, but some tenants could be interested in long-term commitments. Whether you are looking in urban, suburban, or rural areas, this should influence your loan choice for the purchase.
Tax Implications of DSCR vs. Conventional Loans in Georgia
Acquiring a new asset will always come with tax implications. When you have a mortgage for a property, you can deduct the interest payments from your tax bill. A DSCR loan may have higher interest rates, meaning you will pay more to borrow money.
However, this means the amount you can deduct from the tax bill is higher. You can also deduct certain property expenses from your taxable rental income. Some property owners will even deduct depreciation on their investment properties from their taxes.
Always consult with a tax professional to understand the effect of a DSCR or conventional loan on your taxes.
DSCR vs. Conventional Loan: Finding the Best Fit in Georgia
What is the final word on the DSCR loan vs conventional mortgage question? It depends on your financial situation and investment objectives. DSCR loans are ideal for expanding portfolios and purchasing more valuable investment properties that generate substantial rental income. Conventional mortgages can work well for first-time investors or those seeking low-risk assets.
Finding the right lender is key to financing a property and generating sufficient income to cover your current debt obligations. TrueWay Mortgage has plenty of experience helping investors choose between DSCR and conventional mortgages, depending on their needs.
Our team will help you find a solution that works to expand your profile and earn a strong rental income. Call us today at 404-962-0032 for a free consultation about your investing strategy and financing needs.
FAQs
Can I switch from a conventional loan to a DSCR loan for an existing property in Georgia?
While it is possible to refinance a conventional loan on a property into a DSCR loan, there are few situations where this makes sense. Conventional mortgages tend to have lower interest rates, so your payments are unlikely to improve much with a switch. You could pursue a cash-out refinance to afford a down payment on a DSCR mortgage for a new property.
Are DSCR loans or conventional loans better for financing short-term rentals in Georgia?
It depends on your borrower credentials. If you are buying a single-family home for short-term rentals in a hot market, a conventional loan can reduce ongoing costs. However, if the property’s income is reliable and your personal income is complex, it might be easier to secure a DSCR loan.
How do closing costs differ between DSCR loans and conventional loans in Georgia?
DSCR loans are slightly riskier, and lenders calculate this additional risk into interest rates and closing costs. Therefore, a conventional loan for the same amount will likely have fewer closing costs than a DSCR loan.
Can DSCR loans be used to finance mixed-use properties in Georgia?
Yes, you can purchase a mixed-use property with a DSCR loan that includes commercial and residential aspects. A trusted lender can help you make an informed decision based on your personal circumstances and help evaluate the property.
