DSCR loan low rental appraisal?

Question

I just got an appraisal back for a property I am trying to cash out refi. I bought it for $100k and the appraisal came back at it being worth $210k but only worth $1000 a month in rent (the rental comps are nowhere near as nice as the house in my opinion and one of them is really a house converted to an office). My application says the home should rent for $1500 and is worth $195k. Personally I wouldn’t rent it for less. I imagine this will be an issue?

Katie Smith · Answer

Hi John! Are you working with a broker or direct lender? This is when working with a broker comes in handy - as they can get creative with other lending channels. Some lenders will only use the monthly rental income on the 1007, and others will allow a variance if you have a current lease. I recently had a similar situation occur with one of my clients. They had a lease in place for $2,350, and the 1007 came in at $1,995. The channel we originally were going with only takes the 1007 number - we tried to dispute the appraisal with supporting comps and the fact that the appraiser completely missed a bathroom but they wouldn't increase the 1007 amount. We then moved the borrower to another channel that allows a variance AND an appraisal transfer, so they did not have to pay for another appraisal. I would try an explore another option.

Robin Simon · Answer

A little aggressive and direct but to be honest totally accurate - first step here especially since you are in a refinance position is to get it rented and then challenge the market rent numbers

John Asher · Answer

I went looking through my loan docs and the lenders site and actually can’t find anything regarding ratios. They do have a post suggesting they will do deals above a 1 to 1 ratio but give no specifics. I take issue with the comps due to the quality of the properties selected (mine is fully updated while theirs was not) and one of the properties is now an accountants office. It’s not even being used as a residential property. The appraiser also seemed to exclusively use Zillow to find properties and 2 of the subject properties had their leases end this year.

AJ Wong · Answer

Hi John, could definitely be an issue as for DSCR loans the appraisal income is typically the number used for qualifying. Whether the lender allows it will depend on the ratio required. Usually a 1 to 1 or 1.25 is standard..or the $1k needs to be sufficient to cover the PITI of the proposed loan. Check with your lender..You might also be able to do an appraisal 'review.' Or get a tenant in there at market rates? Worst case scenario check in with @Joseph Chiofalo he just helped a client with niche investor that has no ratio requirement and the unit can be vacant. The LTV might be limited but most DSCR can go up to 75-80% on a cash out with above average credit. This particular refi the appraisal was ordered Tuesday and received yesterday..also at expected value..and rents. Good luck!

Erik Estrada · Answer

@John AsherIf your goal is to maximize cash out proceeds, you can look into short term bridge financing and take out up to 80% ltv cash out or do a 75% LTV no ratio DSCR loan.

Erik Estrada · Answer

Not all lenders use the lesser of the two. A few will use the higher of the two as long as there is no more than a 20% variance

Ko Kashiwagi · Answer

Hi John,You could challenge the appraisal and see how it goes. Typically the revision forms allow you to specify description and reasoning. Also some lenders will go up to 125% of market rent, which should make it easier to qualify. There are also "negative" DSCR programs out there that allows you to go even below 1.0 DSCR. Finding a lender with either a creative solution or lower rates seem to be key here.

V.G Jason · Answer

Get a lease in place, if you're so damn confident.

Zach Edelman · Answer

Seconding this point. Also certain lenders will either allow for you to execute a partial IO loan which is where typically the front end of the loan (5-10 years) has interest only payments. The lender can then use the interest only payments to qualify the DSCR ratio, allowing for a higher DSCR. Want to also add that certain DSCR lenders should be able to execute even with a sub 1.00x DSCR.

Robin Simon · Answer

Not 100% accurate - some DSCR Lenders will use the lesser of the in-place or 125% of market rent - so in this case @John Asher if you would get it rented at $1,500 and the 1007 Market Rent is showing $1,000 - you would get credit for 125% of the market rent or $1,250 which should allow it to more easily qualify