Newish Investor - DSCR loan options for a house hack duplex in San Antonio

[Rebecca B.]

I'm a newish investor, bought a duplex in San Antonio, TX to house hack last year. Major unexpected repairs meant we only had enough money to fix one unit in 2023, but I anticipate finishing renovations on the second unit by Summer 2024. These are the details:

• * Approx. ARV: $225,000
• * Loan balance: $135,000
• * Current mortgage rate: 7.65% APR
• * Monthly mortgage (PITI): $1520
• * Rents :
  • - 1 unit - $1500 (midterm rental)
  • - 1 unit - $800 (long term rental - anticipated rent)
• *Approx. FICO score: 690-700 (no negative marks but my DTI is kind of high at 30% usage)

The deal is not great, but please be kind. I'm doing my best to make it work. I want to refinance into a DSCR loan when renovation is complete. I've never used this type of loan product before but I'd really like to refinance into a DSCR loan. Are rates low enough for this deal to make sense? What kind of points, closing costs, and rates can I expect? Any resources where I can learn more about this type of loan?

[Robin Simon]

Hi - assuming you are done with the "house hacking" parts (i.e. not living in the property and can document that) - this could certainly work for a DSCR Loan. Rates have come down a bit and can work in certain situations - but this one looks like it potentially has the factors to make DSCR work in this environment (lower on the value range, multi-unit, creative leasing strategies i.e. MTR).

Rates and Fees can vary - probably looking now (but things can change fast by summer) of rates in the 6.5-8.5% range and closing fees anything from 0 points to a heavy buydown (3-4 points) for flexible lenders.

As for resources, check out this 10-part article series on DSCR Loans published here on BP last year, should cover everything you need to know!

DSCR Loans: What Are They And How To Get The Best Terms

https://www.biggerpockets.com/...

DSCR Loans: How To Use Pro Strategies To Save More And Make More

https://www.biggerpockets.com/...

Multifamily DSCR Loans: A New High-Impact Loan Option For Real Estate Investors?

https://www.biggerpockets.com/...

12 Frequently Asked Questions (And Answers) About DSCR Loans

https://www.biggerpockets.com/...

8 More Commonly Asked Questions and Answers to DSCR Loans

https://www.biggerpockets.com/blog/eight-questions-and-answe...

What Documents Do You Need for a DSCR Loan?

https://www.biggerpockets.com/blog/what-documents-do-you-nee...

BRRRR Loans: What Are the Options, and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/short-term-rental-loans-a...

DSCR Loans: Terms to Know When Working With These Popular Rental Loan

https://www.biggerpockets.com/blog/dscr-loans-terms-to-know

What’s Next For DSCR Loans? Updates For 2024 and Beyond

https://www.biggerpockets.com/blog/what-is-coming-in-2024-fo...

[Bonnie Low]

@Robin Simon thanks for posting all these links on DSCR loans. I'm looking to do my first DSCR so this is coming in very handy right now!

[Kristen L Garner]

Hi Rebecca! There are tons of options and ways to structure when it comes to DSCR. Some things to consider:

* usually used for single family or 2-8 multi family unit properties (fits your scenario)

* must be for investment, non owner occupied (if looking for a product for alternative qualifying solutions for owner occupied there are other products)

* can close in a personal name or LLC

* usually 80% LTV for a purchase (20% down payment) & usually 75-80% LTV for cash out refis

* prepayment penalties vary and are optional, but the higher the prepayment penalty, the lower the rate / options typical range from no prepay all the way up to 5 year prepay and structures vary for how those penalties work (3 year is my most popular by far)

* appraisal most likely required and paid out of pocket during transaction

* can be used for long term, mid term, or short term rental properties 

* generally 1%+ is the desired DSCR ratio but you get better rates if the ratio is higher (usually rate breaks kick in at 1.15%+ or 1.25%+) and you can still get the loan done if ratio is lower than 1% but the rate will reflect that (DM me if you wand help learning how to calculate the ratio)

* the average time to close is 21-30 days

* fees vary lender to lender and product to product, but $1595 underwriting plus title fees is pretty standard

* 700+ credit is preferred to get max LTV, but plenty of options if credit falls below that

* a typical loan minimum is $75k (have limited options for $50k+) and typical loan maximum is $3-4m (have limited options for $4m+)

* 3 months reserves usually required, having 6+ months will usually result in better loan terms, 0 reserves can still get the job done if you go with a program that allows you to use the cash flow as reserves

* 30 year fixed, IO, and ARMS available

[Rebecca B.]

@Robin Simon As for your question, yes, I've fulfilled my "house hacking" term and have since moved out of the property but renovations are still underway on one of the units. Thank you for taking the time to answer and for providing the numerous resources, I'll definitely take a look at these. Much appreciate it!

@Kristen L Garner Thank you for this breakdown, so helpful!

[Derek Brickley]

Totally agree with what has already been said. There is a lot of flexibility with the non-QM realm so DSCR can be tailored to work with your goals/situation in most cases! Different lenders will have different guidelines and programs so I'd encourage you to look around

[Jared Rine]

@Rebecca B....just adding my $0.02 to the mix.  There are some good responses to the thread. Looking at the situation, your deal should work for what's available in the market at this time, but the market texture is so fickle right now, this all might be different come summertime. Depending on source, I'd expect mid/high 7s-low 8s % range. It would be considered a smaller deal for most, so points might be higher. If you add some interest-only basis, your payment will could potentially be lower than what you're paying now.  Especially if you're just rate/term refinancing, and not trying to obtain any cash out.

The only thing that might be a small wrench would be figuring out rents. Are the long term market rents for larger unit = midterm rental rents?? Most lenders either base off long term rents or STR/airbnb rents. There's no ground I've seen for mid-term rental rents - a lender is not going to look at those rents because it's hard to find data. Most DSCR lenders don't even really want to do STR rents (honestly). That might be the only thing I'd be concerned - what rents are being used and will the #'s work to where you can get a loan. Hope that helps. Good luck in finishing the property.

[Stacy Raskin]

Generally there are some DSCR lenders who will go down to a 620 middle mortgage FICO score but you will definitely get better terms if the score is higher as far as max LTV and rate. Rates are in the 7s and up depending on the exact middle mortgage FICO score, LTV, prepayment term. Depending on the lender, fees are generally going to be around $1,495-$1,995 for underwriting, and a lender or broker will generally charge around 2% of the loan amount (depending on the loan amount a lender or broker may charge less or more as the same work to do a $50K loan as a $500K loan). Then there's usually Title/Escrow fees and an appraisal fee.

More 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+ generally gets best pricing for investment property loans with most lenders

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

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.

[Erik Estrada]

Quote from @Rebecca B.:

I'm a newish investor, bought a duplex in San Antonio, TX to house hack last year. Major unexpected repairs meant we only had enough money to fix one unit in 2023, but I anticipate finishing renovations on the second unit by Summer 2024. These are the details:

• * Approx. ARV: $225,000
• * Loan balance: $135,000
• * Current mortgage rate: 7.65% APR
• * Monthly mortgage (PITI): $1520
• * Rents :
  • - 1 unit - $1500 (midterm rental)
  • - 1 unit - $800 (long term rental - anticipated rent)
• *Approx. FICO score: 690-700 (no negative marks but my DTI is kind of high at 30% usage)

The deal is not great, but please be kind. I'm doing my best to make it work. I want to refinance into a DSCR loan when renovation is complete. I've never used this type of loan product before but I'd really like to refinance into a DSCR loan. Are rates low enough for this deal to make sense? What kind of points, closing costs, and rates can I expect? Any resources where I can learn more about this type of loan?

 Hi Rebecca, 

Assuming you do not owner occupy this property and you can show you are living somewhere else for the past 12 months, you should be able to refinance with a DSCR loan at 75% LTV on a Cash out Refi. Rates might be better come around summertime