DSCR Loan Clarification Post

[Sanat Bhandari]

I've seen a ton of interest in the DSCR loans from investors and just wanted to clarify some of the minor details of an actual DSCR loan:

- The rental income used to calculate DSCR is based on the lower of market rent value on the 1007 or the rents at which the subject property is rented out. 

So if you rented your property for $1,500/mo and 1007 says the market rent value if $1,300/month, we'll be limiting your leverage based on the $1,300/month number and not the former. 

- DSCR = NOI/DS (NOI = Net Operating Income and DS = Debt Service) is correct and used for MFH and commercial property DSCR evaluations

However, on 1-4 unit properties from a lending perspective, DSCR = (Lower of gross Income determined by 1007 or lease agreement)/PITI (add flood insurance to the denominator if the property is in a flood zone, HOA if there is one)

- Your credit score matters a lot in determining the terms of the loan . The difference in terms between a 680 and a 740 is fairly substantial (a higher differential in pricing than if the loan was conventional/FHA/VA/USDA type)

- There's customizable options for everything, including rate locks, prepays, front-end/back-end broker compensation, I/O options (and a range of I/O options) etc

- Generally speaking, we're looking at seeing immediate access to 6 month liquid reserves (not necessarily escrowed) so that the buyer can cover the property's debt after closing were it not to be leased 

A real life example: a client of mine thought the DSCR for his property is 1.2 for a cash-out refinance based on

DSCR = $1000 (current leased value)/$750 (PITI) = 1.2 ------- (1) 

Upon closer inspection, found out that the property is in a flood zone which adds $100/month to the expenses. To add to the mix, there was an HOA of $50/month and the appraisal came in at $950/month for market rent value. By the time the loan got to closing, the DSCR evaluated was

DSCR = $950 (lower of the 1007 value/leased value)/($750+$100+$50) = 1.055 --------- (2) 

The difference in rate pricing between (1) and (2) was a cool 75 bps or 0.75% interest rate which in the current climate can completely kill cash flows. 

When I started out as an investor, I made this mistake. I see plenty of investors making this mistake and failing to realize that these nuances and wanted to make sure others learn from my experience

[Stephanie P.]

The key to working with wholesale DSCR lenders is to know what they do, what they need in the loan to do what they do AND know what they don't do or bend on. What many brokers do that makes a rough situation worse is they send a wholesale lender a loan that needs exceptions and expect them to do it because you have a "relationship" with them. The relationship may be with the broker and the account executive, but that wholesale lender has to sell that loan in a pool and if it has exceptions that they can't justify, then they're on the hook for the loan or they'll sell it at a discount.

Most wholesale lenders are really good at what they do and really bad at what they don't do.

One girl's opinion

Stephanie