Skip to content
×
PRO
Pro Members Get Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
$0
TODAY
$69.00/month when billed monthly.
$32.50/month when billed annually.
7 day free trial. Cancel anytime
Already a Pro Member? Sign in here

Join Over 3 Million Real Estate Investors

Create a free BiggerPockets account to comment, participate, and connect with over 3 million real estate investors.
Use your real name
By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.
The community here is like my own little personal real estate army that I can depend upon to help me through ANY problems I come across.
Private Lending & Conventional Mortgage Advice
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

Updated over 1 year ago, 05/16/2023

User Stats

34
Posts
11
Votes
Greg Maden
Pro Member
  • Investor
  • Kingston NY
11
Votes |
34
Posts

DSCR Loan question

Greg Maden
Pro Member
  • Investor
  • Kingston NY
Posted

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?

  • Greg Maden
  • User Stats

    199
    Posts
    101
    Votes
    Zane Cress
    Agent
    • Realtor
    • Athens, GA
    101
    Votes |
    199
    Posts
    Zane Cress
    Agent
    • Realtor
    • Athens, GA
    Replied

    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.

    • Zane Cress

    User Stats

    9,861
    Posts
    5,546
    Votes
    Eliott Elias#5 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
    • Investor
    • Austin, TX
    5,546
    Votes |
    9,861
    Posts
    Eliott Elias#5 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
    • Investor
    • Austin, TX
    Replied

    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.

    CLOSED Title logo
    CLOSED Title
    |
    Sponsored
    CLOSED Title is the Investor Friendly Title Company CLOSED Title, founded by real estate investors. Double closings, assignments, we do it all.

    User Stats

    1,085
    Posts
    729
    Votes
    Ray Hage
    • Investor
    • Fort Lauderdale, FL
    729
    Votes |
    1,085
    Posts
    Ray Hage
    • Investor
    • Fort Lauderdale, FL
    Replied
    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).

    User Stats

    469
    Posts
    350
    Votes
    Ash Hegde
    • Lender
    • Fort Lauderdale, FL (Lending in FL CT GA MI PA)
    350
    Votes |
    469
    Posts
    Ash Hegde
    • Lender
    • Fort Lauderdale, FL (Lending in FL CT GA MI PA)
    Replied

    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.

    User Stats

    4,456
    Posts
    4,331
    Votes
    Robin Simon
    Pro Member
    #3 Real Estate Deal Analysis & Advice Contributor
    • Lender
    • Austin, TX
    4,331
    Votes |
    4,456
    Posts
    Robin Simon
    Pro Member
    #3 Real Estate Deal Analysis & Advice Contributor
    • Lender
    • Austin, TX
    Replied
    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.

  • Robin Simon
  • [email protected]
  • User Stats

    1,483
    Posts
    500
    Votes
    Devin Peterson
    Lender
    • Lender
    500
    Votes |
    1,483
    Posts
    Devin Peterson
    Lender
    • Lender
    Replied

    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

    business profile image
    Miller Mortgage
    5.0 stars
    82 Reviews

    User Stats

    427
    Posts
    270
    Votes
    Kristen L Garner
    Pro Member
    • Lender
    • Phoenix, AZ
    270
    Votes |
    427
    Posts
    Kristen L Garner
    Pro Member
    • Lender
    • Phoenix, AZ
    Replied

    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.

  • Kristen L Garner
  • [email protected]
  • 213-880-0434
  • User Stats

    4,876
    Posts
    2,756
    Votes
    Stephanie P.
    Pro Member
    #4 Mortgage Brokers & Lenders Contributor
    • Washington, DC Mortgage Lender/Broker
    2,756
    Votes |
    4,876
    Posts
    Stephanie P.
    Pro Member
    #4 Mortgage Brokers & Lenders Contributor
    • Washington, DC Mortgage Lender/Broker
    Replied
    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

  • Stephanie P.
  • User Stats

    248
    Posts
    152
    Votes
    Brandon Beardt
    Lender
    Pro Member
    • Lender
    • La Crescenta, CA
    152
    Votes |
    248
    Posts
    Brandon Beardt
    Lender
    Pro Member
    • Lender
    • La Crescenta, CA
    Replied
    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.

  • Brandon Beardt
  • [email protected]
  • 818-726-2418
  • User Stats

    2,886
    Posts
    2,327
    Votes
    Caroline Gerardo
    • Lender
    • Laguna Niguel, CA
    2,327
    Votes |
    2,886
    Posts
    Caroline Gerardo
    • Lender
    • Laguna Niguel, CA
    Replied

    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.

    User Stats

    34
    Posts
    11
    Votes
    Greg Maden
    Pro Member
    • Investor
    • Kingston NY
    11
    Votes |
    34
    Posts
    Greg Maden
    Pro Member
    • Investor
    • Kingston NY
    Replied
    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!! 

  • Greg Maden