DSCR Loans - What to ask and what makes a good candidate for cash-out refi DSCR?

Question

Hi BP community,

I FINALLY finished house hacking a duplex in San Antonio! We lived in it for a year, remodeled both units and put in place a long-term tenant on one unit and a mid-term tenant on the other.

Here's a little more details about this deal:

*   Purchase price: $163k*   Financed price: $132k @ 7.625% APR

*   After repair (estimated value): $225k

*   Gross rents: $2150 ($750 one year lease & $1400 six month lease)

*  Annual taxes and insurance: $7000

*  Approx credit score: 650 (I used interest free credit card to pay for remodeling this property and maxing it out caused my score drop almost 50 pts!)

I'd like to refinance into a DSCR loan and pull $35k cash out to payoff a HELOC that I used as down payment. My questions for this community would be: Does this deal make sense to DSCR lenders? And what questions should I be asking when I start shopping for a loan? Any advise would be greatly appreciated.

Jason Wray · Answer

Rebecca,

I would offer you this advice as a Banker who does a lot of DSCR loans per month.  I would not let "Anyone" pull your credit or start the DSCR application until your Fico score is 700+ preferably 720 or above.  DSCR is high risk NON/QM so it puts a lot of emphasis on Credit scores 700+ and the DSCR ratio 1.00+.  Meaning you will only be able to get 75% LTV cash out and on a $225K value (if appraisal comes in at $225K) your looking at a loan of $168,750.00.

You have to factor in closing costs and your loan payoff which might put you around $138K to $140K which leaves you with $27K +/- in cash at closing.  If you try and go the DSCR route with a 650 Fico your rate will be in the high 8's.  So if you wait until you get the Fico score up to 720+ it would be closer to 7.499%

Most DSCR lenders require a 680 to 700 for a 75% LTV cash out refinance.  If you find one that goes below 680 the rate will be horrible 8's 9's and at that point its not worth it and ruins cash flow.  I would tell you to pay down your credit cards even if you focus on just one card at a time to get the balance down to 30% or less of credit limit.  "Never" pay off credit cards or it will hurt the scores even more simply pay them down under 30% usage or less.

Connor Hibbs · Answer

Hi Rebecca, DSCR's are great loans for refinancing your investment properties and below are the main things to keep in mind for yourself.

1. FICO Score. Your FICO will not only impact your rate but also the max LTV that will be available to you. Most rate changes happen in intervals of  and ideally, you'll want a + for competitive rates. You can get loans with lower scores, but rates will be much higher.

2. DSCR (Debt Service Coverage Ratio). The short answer is "is your property profitable. This will look at your gross income /your gross fixed expenses (Taxes, Insurance, Mortgage, Association Fees). Most lenders will have a limit here that requires you to be profitable. You may be able to get a loan with a sub 1.0n DSCR but unless you're in a pinch, it may not be the best for you.

3. Equity. Just because you can get max LTV doesn't mean you should. Lower LTV's typically result in lower interest rates. If you don't have a plan for all the money on a cash-out, then you may be better off taking less and holding onto your equity.

Brandon Croucier · Answer

Hi Rebecca,

DSCR Loans are a great tool, depending on your goals this is a doable deal.

75% LTV is possible.

The rate is not going to be pretty, but you can buy you down to a 1 year prepay, get your credit up and with rates dropping, refinance once again in 12-24 months.

Mark Munson · Answer

Hi @Rebecca B.

To echo what others have said above, use the Find a Lender tab and call around to as many as you can. You'll want to ask a few things:

1. Do you lock my interest rate and when? The right answer to this is they should lock your rate for 30 to 45 days and do so immediately upon your credit being pulled and the application submitted.

2. What is your debt service coverage ratio? You want a ratio of 1 to 1, anything higher is more restrictive and can mean you will get less money then you are after.

3. What is your maximum LTV on a cash-out refinance? Most lenders are at 75% LTV, but some go to 80%. 80% LTV will increase your rate fairly significantly.

4. Can you send me a formal term sheet? Make sure you get a formal term sheet to compare apples to apples, don't accept soft quotes.

5. What is your prepayment penalty length and structure? Aim for a 3-year penalty; and a stepdown structure is most preferred.

6. What is your closing time frame? Should be about 24 days.

7. Do you offer buy downs? Some lenders can offer buy downs and even roll that cost into the loan.

8. What are your fees? This should be outlined on the formal quote, but most will have origination points and an underwriting fee (this is also referred to as processing or service fee too).

9. Can I roll my origination fee into the loan? Some lenders offer this as well, but usually at 70% LTV and no greater.

10. How much will the appraisal cost me? Some lenders have fixed costs, but most will go through an Appraisal Management Company for bids. Some lenders also upcharge you and use this as a profit center, so avoid that if you can.

Feel free to reach out if you need any advice. Best of luck!

Givo Aghasi · Answer

Hi @Rebecca B. Considering your goals, a DSCR loan could be a good fit, with 75% LTV within reach. Although the rate may be higher initially, buying down to a one-year prepay is an option. As you improve your credit, you could plan to refinance in the next 12-24 months if rates decrease.

Dylan Martin · Answer

The cash flow is there, however you'll need 75% LTV in order to cover the existing loan and HELOC balance so won't be putting any cash back in your pocket. Also, I'm not sure where you got your numbers from but I would recommend the following:

1) Contact a realtor for a market analysis on your property, offer them $50 but they'll probably do it for free if you know them well. If you are going off of zillow or another online service, it may not account for renovations you have done to the property.

2) Contact a Mortgage Professional for a Soft Pull of your credit. It won't impact your score and will show you the scores Lenders use to qualify you. I have seen sites like CreditKarma or Credit Cards under-report and over-report consumers scores, so they are not the most accurate. They will also be able to give you guidance on credit repair steps and how to increase your scores quickly if needed.

There is definitely a deal here, however you should talk with a mortgage broker or lender first. If you can hold off a month or two and get the scores up you may be able to go to 80% LTV and put some cash back in your pocket.

Patrick Roberts · Answer

As the others have said, a DSCR loan wont be pretty with your current credit, if you can get one at all. Getting your utilization down on your credit cards and heloc will improve your score and should be your priority.

To answer your original question, the questions to ask are about prepayment penalties and points for DSCR loans. Also, get quotes at 70% LTV in addition to 75% - this will make a significant difference in rate and pricing for some lenders. If you have particular lender you want to work with, now is a good time to have a conversation about the MTR rent - lenders will vary on how they calculate this income and the seasoning required. The LTR rent is pretty straightforward.

Jay Hurst · Answer

@Rebecca B.    A couple of questions so I can give you better advice:

1. Have you paid off the credit card you maxed out that is impacting your credit score?  if not, what is the plan? and when does it go from 0% interest to likely 20%~?

2. what property is the HELOC on that you mention? and what is the rate on the HELOC currently?

Rene Hosman · Answer

Are you caring at all if this cash flows? Seems like if you pull out 35k assuming you can get a similar 7.5-8% interest rate (DSCR tend to be slightly higher than primary residence rates) you would be barely breaking even. But perhaps that's no issue for you??

It does seem to pencil out for a DSCR loan as you'd be able to show that you can rent for enough to service the debt!

I would strongly recommend reaching out to a lender who understands investors and various loan types out there, there are a lot of great lenders on the lender finder tool here - https://www.biggerpockets.com/business/finder/lenders

Matthew Crivelli · Answer

@Rebecca B. Sell the house and get out of all the debt. The 650 score will be a major barrier to accessing the equity via DSCR cash out.

DSCR Loans - What to ask and what makes a good candidate for cash-out refi DSCR?

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