Purchase With Conventional and REFI with DSCR?

[August Mickelson]

Hello all. First time poster, long time lurker. Investing for nine years. I own two duplexes in SW FL that I purchased with conventional financing. My debt-to-income ratio is tapped (49.8%) from my lenders perspective and I cannot get into another property. Can I REFI one of my conventional mortgages into a DSCR for that piece of debt to fall off my debt-to-income?

I do not own a single family primary residence, but I want to. I am looking to see how to get lending for this. No debt other than mortgages. W2 income, rental income, small 1099 income. 

[Andrew Postell]

@August Mickelson I mean, you can. But the whole point of DSCR loans is that they avoid your income entirely. Ok, maybe not the WHOLE point (because they do other things to) so why not just use a DSCR loan on your next property?

[Brandon Croucier]

You can, do you intend to occupy the SFR is that why?

[Joseph Chiofalo]

Hi August, 

I see a few ways you go go about structuring the financing. 

How is your credit history?

[Jay Hurst]

Quote from @August Mickelson:

Hello all. First time poster, long time lurker. Investing for nine years. I own two duplexes in SW FL that I purchased with conventional financing. My debt-to-income ratio is tapped (49.8%) from my lenders perspective and I cannot get into another property. Can I REFI one of my conventional mortgages into a DSCR for that piece of debt to fall off my debt-to-income?

I do not own a single family primary residence, but I want to. I am looking to see how to get lending for this. No debt other than mortgages. W2 income, rental income, small 1099 income. 

A few things here.

1)Refinancing a loan (conventional) into another type of loan (DSCR) does NOT lower your debt to income ratio in any way. You will still own that loan and personally guaranty that loan. When you go to apply for the next loan that loan will still be factored into your debt to income ratio. (yes, even if in a LLC. Who owns the business? well, you do of course and yes, even if your DSCR lender does not pay to report to the credit bureaus. the credit report is not, nor has it ever been the arbiter if you have a debt or not nor is it the only way the an underwriter will see that you have a debt.) So, most likely going from a lower rate conventional to a higher rate DSCR you will be just making your DTI worse not better. 

2) However, most loan officers do not seem to know how to calculate rental income which often results in incorrect DTI numbers. See it nearly everyday. This is because your rental income is NOT calculated as simply as taking the rent minus the payment OR by simply taking the negative number on your tax returns.  You are able to add back your non cash deductions which is deprecation. You are also able to add back your deductions for mortgage interest, hazard insurance, HOA dues and property taxes. The reason for this is you are already being hit for these costs in your payment, so hitting you with the deduction on your returns would be double counting.  You would use step 1 and step 2A from this form to come up with your income:  https://content.enactmi.com/documents/calculators/Form1038.C...

3) It was mentioned above to use DSCR for the next property but DSCR loans are ONLY for non-owner occupied so that is not an option for a primary. 

[Patrick Roberts]

Quote from @Jay Hurst:

Quote from @August Mickelson:

Hello all. First time poster, long time lurker. Investing for nine years. I own two duplexes in SW FL that I purchased with conventional financing. My debt-to-income ratio is tapped (49.8%) from my lenders perspective and I cannot get into another property. Can I REFI one of my conventional mortgages into a DSCR for that piece of debt to fall off my debt-to-income?

I do not own a single family primary residence, but I want to. I am looking to see how to get lending for this. No debt other than mortgages. W2 income, rental income, small 1099 income. 

A few things here.

1)Refinancing a loan (conventional) into another type of loan (DSCR) does NOT lower your debt to income ratio in any way. You will still own that loan and personally guaranty that loan. When you go to apply for the next loan that loan will still be factored into your debt to income ratio. (yes, even if in a LLC. Who owns the business? well, you do of course and yes, even if your DSCR lender does not pay to report to the credit bureaus. the credit report is not, nor has it ever been the arbiter if you have a debt or not nor is it the only way the an underwriter will see that you have a debt.) So, most likely going from a lower rate conventional to a higher rate DSCR you will be just making your DTI worse not better. 

2) However, most loan officers do not seem to know how to calculate rental income which often results in incorrect DTI numbers. See it nearly everyday. This is because your rental income is NOT calculated as simply as taking the rent minus the payment OR by simply taking the negative number on your tax returns.  You are able to add back your non cash deductions which is deprecation. You are also able to add back your deductions for mortgage interest, hazard insurance, HOA dues and property taxes. The reason for this is you are already being hit for these costs in your payment, so hitting you with the deduction on your returns would be double counting.  You would use step 1 and step 2A from this form to come up with your income:  https://content.enactmi.com/documents/calculators/Form1038.C...

3) It was mentioned above to use DSCR for the next property but DSCR loans are ONLY for non-owner occupied so that is not an option for a primary. 

Jay is spot on. Even if your refinance into a DSCR to pay off one of the existing loans, there's a 99.9% probability that you will have to PG the new loan. When you apply for conventional financing on the next property, one of the questions you will be asked is, "Are there any debt obligations that you are responsible for that are not disclosed in this application?" Answering no to this question without disclosing you've PG'd a DSCR loan is mortgage fraud, even if the DSCR loan doesn't report on your credit report. If you find a way to get a loan that doesn't require a PG, you're good to go.

I also second you getting another opinion. Given that you've owned these properties for a while, your lender most likely used Sched E to calculate your DTI. A lot of lenders jack up net rental income calcs. If you're lender didnt ask you if you had any one-time or nonrecurring expenses that you reported and didnt go line by line on the sched E expenses with you to find out what each one was, I'd get a second opinion.

Lastly, not owning a primary residence can cause issues with some lenders when getting a DSCR loan. Having an existing rental portfolio will help with, but make sure that this is known up front to your lender if you try to use a DSCR to pickup another property. 

If you're trying to buy a primary, househacking with a multifamily purchase MAY help with the DTI situation - it will just depend on the income from the non-primary unit(s). 

[August Mickelson]

Hello all, thank you for your responses. I intend to personally occupy the single family property I want to purchase, which is why I am not able to DSCR that property.

Credit is okay, 12 years of history with 710 score. 

My lender is only counting the income on my tax returns toward DTI.

I have felt that with every investment property I acquire, I have less and less purchasing power. I have felt like I am going about this venture incorrectly. Perhaps this issue is my lack of sourcing a lender that understands?

[Patrick Roberts]

Quote from @August Mickelson:

Hello all, thank you for your responses. I intend to personally occupy the single family property I want to purchase, which is why I am not able to DSCR that property.

Credit is okay, 12 years of history with 710 score. 

My lender is only counting the income on my tax returns toward DTI.

I have felt that with every investment property I acquire, I have less and less purchasing power. I have felt like I am going about this venture incorrectly. Perhaps this issue is my lack of sourcing a lender that understands?

 Eh, you're doing it right, this is just the environment we're in right now. Cashflow is tight on most deals as rents have not fully kept up with home prices/insurance/taxes/operating expenses. This is reflected on Schedule E, where most of us are already being as tax efficient as possible. Understand that conventional and govt loans are very conservative when it comes to rental income/investment properties, and lately, even calculating personal income has gotten more conservative. Making sure you have a competent scrub of your Sched E income is one option. If you have solid gross income, a bank statement loan may work since you have a mix of w2, schedule C, and schedule E income. 

[Jon Puente]

Hey August, 

DSCR would be your next bet if you are wanting to buy another INV property. What I have found is that right around 2-4 properties, most people are tapped out on DTI and are unable to qualify using a conventional loan.

If you are wanting to buy a primary, make sure your Schedule E on tax returns shows adding back insurance, taxes, repairs, depreciation, etc... The goal would be that you show "X" amount of income (ex: $20,000 for the year) and then your expenses are just below that or right around that (ex: $22,000 for the year).  

When you add these back in, you can use 100% of that income to help lower DTI %. I am happy to show you what this looks like on my tax return if you want. Overall, very simple calculation.

Great Question!

[Charlie Gonzalez]

Hi August

unfortunately, that would not elimine the debt from your DTI. If your goal is to keep acquiring investment properties, going the DSCR route for future purchases would be ideal, as they do not report on credit(with me, the lender of course). But if you're looking to purchase a primary or second home conventionally, you don't want to keep buying investment properties conventionally as it will certainly ding your DTI. Buying with a NON-QM program is the best way to go about it nowadays, as 1: it won't report to credit reports, 2: quicker closings 3: it won't ding your DTI . Please feel free to reach out with any questions. I'm a nationwide lender and I have a great base of mortgage brokers and realtors.

[Stacy Raskin]

DSCR loans often are reported on someone's personal credit report as the vast majority require a personal guarantor. There are some lenders that if an LLC is used say they won't report on personal credit but they require a personal guarantee. So since loans often get sold for servicing (some more than once), even if the original lender doesn't report the loan to the personal guarantor's credit, that may change in the future.

DSCR loans are really set up for investors to scale as DTI isn't an issue and the down payment, borrower's credit score and DSCR ratio are the requirements.

More on DSCR loans: 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 better. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

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

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

As mentioned earlier in the post, 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.

Happy to connect to discuss further.