Cash Out Non DSCR Loan

[Nathan Frost]

Hi, my banker said - We are needing a minimum extra $20k in cash flow in order for this to debt service at 1.25x, which is the industry standard lowest it can be to approve loans, your's now is .98x. Is it possible to do the loan under my LLC? I have two rentals under my LLC but can't do the cash out under my name cause of the debt service. Any solutions?

[Doug Smith]

Hi @Nathan Frost I was a banker for many years before we started this company several years ago. Banks and DSCR lenders are going to look at deals entirely differently...and they calculate DSCR differently. For a DSCR Lender, they only look at what potential rent that the appraiser assigns to the property on the appraisal (using a form called a 1007). They then compare that to the Principal, Interest, Taxes, Insurance, and HOA payments. That's pretty much it, so for a DSCR Lender, DSCR = RENT/(PITI + HOA). The bank is going to add in things like vacancy factors (they might deduct 10%-25% off the rent amount to account for vacancy...that varies from bank to bank). They also will add in maintenance expense, etc. They will use historical data from your tax returns instead of the potential rent that a DSCR lender requires. Banks will usually also look for a much higher DSCR figure like 1.25X-1.30X to qualify, where DSCR lenders are usually at 1.0X-1.1X with many going to below 1.0X for experienced investors with strong liquidity. You can do the loan under your LLC with the bank or with a DSCR lender, but Fannie Mae and Freddie Mac are going to require you to do it in your name. The issue with using Fannie/Freddie on future deals is that while DSCR lenders only look at the cash flow on the subject property, banks and Fannie/Freddie are going to do a "global cash flow", which means that they are going to look at all of your income and all of your debt combined. Math becomes a problem in that Fannie/Freddie only want to see you have a 43% (in reality a bit higher...but let's use 43% for this illustration). I know these numbers are going to be silly, but hang with them for this example. Let's say you have a current job with an income of $1000/mo and your mortgage, car payment, credit card payments, student loans, etc add up to $400/mo, that's a 40% Debt to Income Ratio and you would qualify. Let's now say you find a property that will yield you an additional $1000/mo in rent that positively cash flows by $200/mo...great deal, right?. Well, the bank and Fannie will calculate your new income at $2000 ($1000 current plus $1000 in rent) and compare that to your current outflow of $400 plus your new expenses of $800. You're now at a 60% DTI and you no longer qualify. Fannie makes it almost impossible to scale, so that's why you'll struggle with a bank or Fannie...you're adding multiple rentals to the calculation. I'm happy to explain more if you have Qs, but I think I'll let others chime in. Let me know how I can help. Doug