DSCR Loan question

[Greg Maden]

I am up against my DTI ratio for a traditional mortgage and I have been looking in to the DSCR option and it from what I am seeing it looks like a decent way to continue to scale. Does anyone have insight on what the lender typically looks for on the appraisal? if the house needs work will this disqualify it for the DSCR loan?

[Zane Cress]

It's based on rents and what the property can produce monthly. The lending section of BP has a few suggestions. Aloha Capital is one of the big ones I think.

[Eliott Elias]

The property must be in livable condition. There are categories that appraiser puts the property in, talk to your DSCR lender about what the minimum requirement is.

[Ray Hage]

Quote from @Greg Maden:

I am up against my DTI ratio for a traditional mortgage and I have been looking in to the DSCR option and it from what I am seeing it looks like a decent way to continue to scale. Does anyone have insight on what the lender typically looks for on the appraisal? if the house needs work will this disqualify it for the DSCR loan?

Each lender is going to have slightly different requirements. However, the home must be in currently livable condition so it can be cosmetically ugly or have some very minor issues. If it is currently unoccupied, you'll need market rents to be at least 10-25% above (DSCR of 1.1-1.25) the total cash outflows (PITI plus reserves).

[Ash Hegde]

It will need to be in livable condition. For a distressed property typically you would get a hard money loan for the purchase and rehab then refinance into a DSCR loan once the rehab is done and you place a tenant.

[Robin Simon]

Quote from @Greg Maden:

I am up against my DTI ratio for a traditional mortgage and I have been looking in to the DSCR option and it from what I am seeing it looks like a decent way to continue to scale. Does anyone have insight on what the lender typically looks for on the appraisal? if the house needs work will this disqualify it for the DSCR loan?

SFR Appraisals generally have a property rating on a scale of "C1 to C6" where the lower the number, the better quality. C1 refers to newly constructed, C2 refers to recently fully renovated "like new", C3 refers to average, etc. DSCR lenders generally will only loan on properties with C4 ratings or better, and no more than a couple thousands of dollars of any deferred maintenance flagged

Uniform Appraisal Dataset (UAD) Conditions Ratings and Definitions

Condition Ratings and Definitions
C1
The improvements have been recently constructed and have not been previously occupied. The entire structure and all components are new
and the dwelling features no physical depreciation.
Note: Newly constructed improvements that feature recycled or previously used materials and/or components can be considered new dwellings
provided that the dwelling is placed on a 100 percent new foundation and the recycled materials and the recycled components have been
rehabilitated/remanufactured into like-new condition. Improvements that have not been previously occupied are not considered “new” if they
have any significant physical depreciation (that is, newly constructed dwellings that have been vacant for an extended period of time without
adequate maintenance or upkeep).
C2
The improvements feature no deferred maintenance, little or no physical depreciation, and require no repairs. Virtually all building components
are new or have been recently repaired, refinished, or rehabilitated. All outdated components and finishes have been updated and/or replaced
with components that meet current standards. Dwellings in this category are either almost new or have been recently completely renovated and
are similar in condition to new construction.
Note: The improvements represent a relatively new property that is well maintained with no deferred maintenance and little or no physical
depreciation, or an older property that has been recently completely renovated.
C3
The improvements are well maintained and feature limited physical depreciation due to normal wear and tear. Some components, but not every
major building component, may be updated or recently rehabilitated. The structure has been well maintained.
Note: The improvement is in its first-cycle of replacing short-lived building components (appliances, floor coverings, HVAC, etc.) and is
being well maintained. Its estimated effective age is less than its actual age. It also may reflect a property in which the majority of
short-lived building components have been replaced but not to the level of a complete renovation.
C4
The improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear. The dwelling has been
adequately maintained and requires only minimal repairs to building components/mechanical systems and cosmetic repairs. All major building
components have been adequately maintained and are functionally adequate.
Note: The estimated effective age may be close to or equal to its actual age. It reflects a property in which some of the short-lived building
components have been replaced, and some short-lived building components are at or near the end of their physical life expectancy; however,
they still function adequately. Most minor repairs have been addressed on an ongoing basis resulting in an adequately maintained property.
C5
The improvements feature obvious deferred maintenance and are in need of some significant repairs. Some building components need repairs,
rehabilitation, or updating. The functional utility and overall livability is somewhat diminished due to condition, but the dwelling remains
useable and functional as a residence.
Note: Some significant repairs are needed to the improvements due to the lack of adequate maintenance. It reflects a property in which many
of its short-lived building components are at the end of or have exceeded their physical life expectancy but remain functional.
C6
The improvements have substantial damage or deferred maintenance with deficiencies or defects that are severe enough to affect the safety,
soundness, or structural integrity of the improvements. The improvements are in need of substantial repairs and rehabilitation, including many
or most major components.
Note: Substantial repairs are needed to the improvements due to the lack of adequate maintenance or property damage. It reflects a property
with conditions severe enough to affect the safety, soundness, or structural integrity of the improvements.

[Devin Peterson]

Very relaxed standards for appraisal, as long as it's in livable condition has a roof yes DSCR should be able to lend on it

[Kristen L Garner]

Hi Greg, As long as the property is in livable condition and the appraisal comes back "as is" rather than "subject to" you will be fine. There are fix and flip, ARV, rehab loans, etc if the property needs work. Otherwise, the main qualifying factors are your reserves, credit score, and the DSCR ratio.

[Stephanie P.]

Quote from @Greg Maden:

I am up against my DTI ratio for a traditional mortgage and I have been looking in to the DSCR option and it from what I am seeing it looks like a decent way to continue to scale. Does anyone have insight on what the lender typically looks for on the appraisal? if the house needs work will this disqualify it for the DSCR loan?

 @Robin Simon gave a pretty comprehensive answer about condition but I'll add a little more.

Distance from the comps is a big deal.  If the appraiser is stretching for a value because nothing's close to the subject in style or size or condition, it's generally apparent.  Going over natural boundaries like rivers or manmade boundaries like highways or railroad tracks to find a comparable is something lenders look at as well.  

On DSCR, the property and the guarantor/borrower's credit is all they have, so lenders don't like deferred maintenance or comps that are way out of the subject property's neighborhood or even cape cods comped to split foyer type houses. Houses that are similar in neighborhood, style, condition, size, time on the market and age are all things lenders look for in a property. They'll adjust the value for each, either up or down, to get the appraised value, but adjustments that equal more than 10% of the final value require an explanation.

Hope that helps

Stephanie

[Brandon Beardt]

Quote from @Greg Maden:

I am up against my DTI ratio for a traditional mortgage and I have been looking in to the DSCR option and it from what I am seeing it looks like a decent way to continue to scale. Does anyone have insight on what the lender typically looks for on the appraisal? if the house needs work will this disqualify it for the DSCR loan?

For DSCR, the appraisal should come back "as-is" and not "subject-to" any sort of repairs. Pictures of the interior of the property should show that it is currently in habitable condition as well. Don't want to see any holes in the walls, mold, or broken windows, etc. The lender will also look at the 1007 report as it will indicate the appraiser's determination of the monthly market rent for the property. This will usually be the income variable used to determine the DSCR ratio. You'll just want to make sure the new projected monthly mortgage payment is greater than or equal to the market rent shown on the 1007. If it's less, you'll have to either submit a rebuttal with better rental comparables or lower your leverage to get the ratio back in line.

[Caroline Gerardo]

Subject to on the appraisal means there is work required to meet code standard. This is a hard stop as in DSCR appraiser also does a market rent survey, and at closing you need a lease and deposit check.

Think this way- roof no good, no appliances, or visible code violations then DSCR is not a fit. Before you make the offer you need to be crystal clear. Don't make an offer releasing contingencies on a property that is not ready to rent at closing. @Robin Simon gave a great and detailed explanation as to property conditions that do or do not work. These lenders care about property, credit, the DSCR ratio, and reserve funds.

Each "shop" or DSCR lender has their own shades of ins and outs, locations they will or won't, minimum rules that cannot get exceptions. They sell the loans just like other loan types but to investors with different credit appetites. A DSCR lender shifts the rules as the market conditions change.

[Greg Maden]

Quote from @Robin Simon:

Quote from @Greg Maden:

I am up against my DTI ratio for a traditional mortgage and I have been looking in to the DSCR option and it from what I am seeing it looks like a decent way to continue to scale. Does anyone have insight on what the lender typically looks for on the appraisal? if the house needs work will this disqualify it for the DSCR loan?

SFR Appraisals generally have a property rating on a scale of "C1 to C6" where the lower the number, the better quality. C1 refers to newly constructed, C2 refers to recently fully renovated "like new", C3 refers to average, etc. DSCR lenders generally will only loan on properties with C4 ratings or better, and no more than a couple thousands of dollars of any deferred maintenance flagged

Uniform Appraisal Dataset (UAD) Conditions Ratings and Definitions

Condition Ratings and Definitions
C1
The improvements have been recently constructed and have not been previously occupied. The entire structure and all components are new
and the dwelling features no physical depreciation.
Note: Newly constructed improvements that feature recycled or previously used materials and/or components can be considered new dwellings
provided that the dwelling is placed on a 100 percent new foundation and the recycled materials and the recycled components have been
rehabilitated/remanufactured into like-new condition. Improvements that have not been previously occupied are not considered “new” if they
have any significant physical depreciation (that is, newly constructed dwellings that have been vacant for an extended period of time without
adequate maintenance or upkeep).
C2
The improvements feature no deferred maintenance, little or no physical depreciation, and require no repairs. Virtually all building components
are new or have been recently repaired, refinished, or rehabilitated. All outdated components and finishes have been updated and/or replaced
with components that meet current standards. Dwellings in this category are either almost new or have been recently completely renovated and
are similar in condition to new construction.
Note: The improvements represent a relatively new property that is well maintained with no deferred maintenance and little or no physical
depreciation, or an older property that has been recently completely renovated.
C3
The improvements are well maintained and feature limited physical depreciation due to normal wear and tear. Some components, but not every
major building component, may be updated or recently rehabilitated. The structure has been well maintained.
Note: The improvement is in its first-cycle of replacing short-lived building components (appliances, floor coverings, HVAC, etc.) and is
being well maintained. Its estimated effective age is less than its actual age. It also may reflect a property in which the majority of
short-lived building components have been replaced but not to the level of a complete renovation.
C4
The improvements feature some minor deferred maintenance and physical deterioration due to normal wear and tear. The dwelling has been
adequately maintained and requires only minimal repairs to building components/mechanical systems and cosmetic repairs. All major building
components have been adequately maintained and are functionally adequate.
Note: The estimated effective age may be close to or equal to its actual age. It reflects a property in which some of the short-lived building
components have been replaced, and some short-lived building components are at or near the end of their physical life expectancy; however,
they still function adequately. Most minor repairs have been addressed on an ongoing basis resulting in an adequately maintained property.
C5
The improvements feature obvious deferred maintenance and are in need of some significant repairs. Some building components need repairs,
rehabilitation, or updating. The functional utility and overall livability is somewhat diminished due to condition, but the dwelling remains
useable and functional as a residence.
Note: Some significant repairs are needed to the improvements due to the lack of adequate maintenance. It reflects a property in which many
of its short-lived building components are at the end of or have exceeded their physical life expectancy but remain functional.
C6
The improvements have substantial damage or deferred maintenance with deficiencies or defects that are severe enough to affect the safety,
soundness, or structural integrity of the improvements. The improvements are in need of substantial repairs and rehabilitation, including many
or most major components.
Note: Substantial repairs are needed to the improvements due to the lack of adequate maintenance or property damage. It reflects a property
with conditions severe enough to affect the safety, soundness, or structural integrity of the improvements.

 Thank you all so much for all the information. This is extremely helpful!!