DCSR Loan and forms of Financing

[Josh Calcanis]

Hey BP - I'm finally on the hunt for some new properties for 2022. I've been pumping up the other portions of my portfolio and putting a lot of my time into our startup (which we'll hopefully see an M&A this year), so I'm taking my time getting acquainted with some other forms of financing. I've done the traditional loan route, the cash-out refi and use that capital for another property, and then the FHA route (BRRR).

Through my research and talking with two lenders (one I've used the other is a referral) I've come across a DCSR loan. It reads as a commercial loan, but I still can't get something over 4 doors. It also seems to have some early payoff penalties and higher rates than a traditional investment property loan. The one benefit I've got and why I'm looking at it is the fact that I could get the loan without having to Quit Claim the properties again (all units are in my LLC).

Does anyone have some general advice or experience with a DCSR loan? Would you use this as your last resort? Is there anything I'm missing?

[Nick Belsky]

One of the things I love about BP forums is that posters can get a variety of experiences from lenders, investors, etc... One thing to always keep in mind, is that we all have different experiences with different service providers.  Even from the lending side, it would be a rare instance where two lenders/brokers are using the exact same lenders for their clients.  There are many features and loan structures out there and once you get outside of conventional and agency backed loans, the rules are up to the backing investors and they can vary quite a bit.  To say a feature or structure doesn't exist or is ONLY this way or that is a fallacy.  There seems to be at least one scenario out there where those features or structure do in fact exist.  The best way to find out is call the lender/broker and find out how. Your scenario may fit, it may not.  Either way, you don't know unless you speak with someone about the specifics of your scenario.

As several have pointed out in this thread, terminology can change from person to person just like each person's respective experience.  I speak with several well seasoned investors every week who don't believe me when I tell them that you can get 30 year fixed rate loans with no strings attached on investment and commercial properties.  They've never heard of them.  It happens all the time.  It's not to say they are wrong, they simply haven't been exposed to a lender/broker who offers them yet.  I am a teacher, a licensed Loan Officer, and a broker.  We never stop learning.  More importantly, each state has different definition of what is what.  Some will lay out specifically what is considered commercial and what is residential, others are more vague.  Each state may differ in the RE contracts and headings and such as well.  I do not presume to know the ins and outs of each state's definitions off the top of my head.

@Juan Campos

Not necessarily. If you were to refinance the existing home out of your FHA and into conventional, you could purchase another FHA property. Fannie is clear on this, but sometime Underwriters get twitchy and won't approve loan. From my experience, provided you refi out of your current FHA loan, you should be fine to use FHA again then move into that property as you did before. With conventional, the guides are slightly different. You could absolutely buy another property with Conventional without moving into it. It would be designated at Non-Owner Occupied (NOO) and be priced as an investment property.

Fannie/Freddie will limit you to 10 loans, not including your primary residence. Many investors with purchase or refi into the DSCR loans to "free up slots" with Fannie/Freddie loans so they can continue to get the benefit of low down payment properties when house hacking. As others have pointed out above, many DSCR lenders DO NOT report to your personal credit bureaus. However, several Non-QM lenders I've worked with DO report to your personal credit even if you are closing a DSCR loan under an entity. Be sure to inquire with the lender/broker you are working with if this is important to you.

@Joe S.

All depends on the property, the lender, and the guarantor's credit profile.  In general, you are still looking at 20-25% down on 5+ unit at prime conditions.  I've got a few who won't go over 70LTV though and 75LTV requires an exception with strong compensating factors.  The Commercial world is a bit different from the 1-4 unit world.  I closed on an 8-unit cash out refi last month at 80LTV and know of very few lenders who will do 80LTV on cash outs even for 1-4 units... but the loan does exist.

Cheers!