DSCR Loan for primary residence/house hack?

Question

Hey Everyone! Looking to get some advice and guidance on DSCR (Debt service coverage ratio) lending. My goal is something along the lines of a house hack by purchasing a single family home with maybe 4 bedrooms and living in one and renting out the other 3 rooms to roommates. I am a recent college grad and have several friends looking for affordable rental options and see it as an opportunity to jump start my investing journey. Id want to have the mortgage and expenses covered by the rental income and hopefully a little cash flow as well. I have some cash for the down payment, but it looks like the down payment for these loans can be 20-30%. Im in the Atlanta market, which is pricey. And this will be my first home purchase. I like this loan for my situation because Im a realtor so I have inconsistent income and little credit history so it seems like a good option because they lend based on the income of the property.

Wanting to know if anyone has any experience with something like this? Or any recommendations for other options instead of or in addition to this type of loan to fund a deal like this? What ratio should I look for? Also, if I used a DSCR loan and took title to the property in an LLC, could I still use an FHA first time home buyer loan for another home purchase later on? Any feedback is appreciated. TIA

Stephanie P. · Answer

Hey MeredithWelcome to BP!!DSCR won't be an option for you on this. The best multi-family loan product out there right now is FHA. The downside is upfront mortgage insurance (MI) along with monthly MI that doesn't go away. Additionally, many sellers in a seller's market won't take a loan with FHA for financing.If you can find a multi family in Atlanta and if the seller allows for FHA, the property itself has to qualify if it has 3-4 units using 75% of the rents. Once you get past all of those hurdles, you should be good.All the bestStephanie

Austin Bull · Answer

@Meredith Von KleydorffI just saw this post 1 yr later! I'm in the same boat as you were a year ago, except I have a commission job in a different industry(residential plumbing) with less than 2 years of commission pay history.. So my income now would make it more difficult to get a conventional loan. I also have cash saved up and want to house hack in Arizona. Did you end up figuring anything out? Did you end up getting a loan and getting that first real estate property? And if so how did you do it?

Robin Simon · Answer

Hi Meredith - sorry to burst your bubble but DSCR loans are strictly for investment properties and you have to sign loan documents / affidavit that you will not live in the property. Good news is that there are a ton of non-DSCR options for your situation, generally look for a non-QM mortgage broker. Also, it will be pretty much impossible to qualify a property that is a 4-bedroom SFR with multi-tenant rental income, you are much better off doing this as a duplex/triplex/quadruplex, living in one and having the tenants actually renting distinct units

Robin Simon · Answer

Generally, the only downside of non-QM will be the higher rates/points than conventional

Brandon Plombon · Answer

Hi @Meredith Von Kleydorff Most banks will want to see 20-25% down. There are ways to get creative with seller carrybacks or other options for the downpayment. As a banker I don't necessarily care who has a 2nd mortgage behind my 1st position mortgage and as long as I am within my guidelines for LTV. Banks will also want to see a 1.1-1.25x DSCR depending on their loan policies.

Levi Mondoza · Answer

I work for a private mortgage broker, so I cannot speak on FHA or conventional loans. We like to see 1.33 DSCR. We'll lend up to 70% of appraised value, if it conforms to the DSCR guideline. I imagine other hard money lenders are similar. You'll have to be very realistic about the type of property you'll be getting in Atlanta. Also consider if you're willing to put all of your savings at risk by diving directly into investing out of college, vs stacking your chips for a while so you can make a more calculated risk. For the A/B class property it seems like you're looking for, that has to be a slamming deal to make it even a little bit worth it. Also, a point to consider is that non-owner occupancy will likely play a role. It goes without saying that it will be difficult to get the loan if you planned to live in it. When I graduated college, I was in a similar position to you, but with ways to go as far as getting adequate savings. God bless California price points, right? But there really isn't a rush... You work for a wholesaler, and I'm sure there might be some benefit to accessing those deals should you have a plan in order. I'd hold tight and learn as much as you can, that way your knowledge base and experience in the industry speaks for you while your traditional "credit worthiness" is still brushing up. With enough time, you'll have much more power as an investor.

Meredith Von Kleydorff · Answer

Hey Robin - thanks for the feedback. I was thinking that might be an issue, but wasnt sure how creative you can get with this kind of loan program. I have looked into small multifamily units, however they are hard to come by and for the right price in Atlanta. Also was hoping to get something relatively turnkey which would be a challenge to find in my price range. What are the risks or downsides associated with a non QM mortgage?