DSCR Loan with 25% seller financing

[Vinessa Eisele]

Under contract on a portfolio of 6 properties/14 long term rental units. Seller financing for the 25% down payment. We are hearing that DSCR loans will not accept a 2nd position lien such as seller financing. How do we get around this other than showing proof of personal funds for the 25%??

Thanks!

[Chris Seveney]

@Vinessa Eisele

Legally you cannot unless the seller financing is partnering with you.

[Anastasia G.]

@Vinessa Eisele is seller willing to create an LLC with you?

[Ryan Hughes]

Where are these properties located. 

[Vinessa Eisele]

@Chris Seveney

We havent asked this question yet, How would we structure this?

[Vinessa Eisele]

@Ryan Hughes Pennsylvania

[Nick Belsky]

@Vinessa Eisele

Interesting negotiating skills.

I have lenders who will allow seconds on DSCR loans, but the "seller financed" part is limited to 15%, whereas the borrower must bring at least 10% of their own funds to the deal. The extra 10% would be split up as 6% max as seller concessions towards closing costs, then the remaining 4% would come off the principal loan amount. I love loans like this. But you need a lender who will work with it. With this lender, the seller is not required to partner with you at all. You will need a contract for the second though.

Sounds to me like you need to find the right lender for this deal.

Cheers!

[Hemanth Chakravarthy Mudduluru]

Hello @Nick Belsky,

Can you kindly share the contact of the lender you were referring to above?

[Orlando Patrick]

@Nick Belsky would love to speak with you about the lenders you mentioned. I have a few situations just like the above mentioned.  Appreciate your time. 

[Chris Seveney]

Quote from @Vinessa Eisele:

@Chris Seveney

We havent asked this question yet, How would we structure this?

Create a LLC where you own 75% and he owns 25%. He contributes 25% of cost to LLC and you in the operating agreement create a path that get them paid back. Will need an attorney to draft this up.

[Stacy Raskin]

Seller contributions are capped by lenders. Generally around 3-6% depending on the down payment. Lenders want the buyers to use their own funds for down payments. They will often ask for two months of bank statements to check on status of funds. If there are large deposits the underwriter will ask for a signed letter of explanation from the borrower along with supporting documents. For example if a borrower is using cash from a cash out refinance, the borrower would have to provide the letter of explanation along with the closing statement to show that the cash out refinance happened. 

There are some lenders who don't ask for bank statements for seasoning.

More info on DSCR loans in case helpful:

DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to discuss further.