DSCR loan for an LLC multiple members. Does the lender look at all credit scores?

[Michael Nguyen]

New to this community, heard great things. New investor looking to learn a lot. Thank you in advance. 

As I mentioned I'm a new investor. I am creating an llc with a couple friends as we go into this new endeavor. My questions is. When getting a DSCR loan whose credit score is the lender going to use? Will they require all members or just one?

[Jay Hurst]

Quote from @Michael Nguyen:

New to this community, heard great things. New investor looking to learn a lot. Thank you in advance. 

As I mentioned I'm a new investor. I am creating an llc with a couple friends as we go into this new endeavor. My questions is. When getting a DSCR loan whose credit score is the lender going to use? Will they require all members or just one?

There are hundreds of DSCR program out there. Some will require to use the lowest credit score while others will just require the majority owner or use the highest if all equal. It just depends on the program. But, understand they will all have slightly different pricing as well, and when you "layer risk" rates/terms go up.

[Jaycee Greene]

Quote from @Michael Nguyen:

New to this community, heard great things. New investor looking to learn a lot. Thank you in advance. 

As I mentioned I'm a new investor. I am creating an llc with a couple friends as we go into this new endeavor. My questions is. When getting a DSCR loan whose credit score is the lender going to use? Will they require all members or just one?

 Hey @Michael Nguyen, welcome to the BP Forum! I am curious if you know what the lowest credit score is among you and your friends. If it's above 700 or 720, I wouldn't worry about it too much (though credit scores are dynamic and change over time, especially with RE developers).

[Brittany Minocchi]

Very lender dependent. Some only look at the credit of the guarantor, some look at all members and/or require them to be guarantors etc. 

[Andrew Zamboroski]

Quote from @Michael Nguyen:

New to this community, heard great things. New investor looking to learn a lot. Thank you in advance. 

As I mentioned I'm a new investor. I am creating an llc with a couple friends as we go into this new endeavor. My questions is. When getting a DSCR loan whose credit score is the lender going to use? Will they require all members or just one?

Great question to ask the lender you want to work with. Each can have a variation of their credit policy. You may also want to ask when a member must be a guarantor of the loan, if a hard or soft credit inquiry is done, and if the loan reports to personal credit.

cheers!

[Brandon Beardt]

Quote from @Michael Nguyen:

New to this community, heard great things. New investor looking to learn a lot. Thank you in advance. 

As I mentioned I'm a new investor. I am creating an llc with a couple friends as we go into this new endeavor. My questions is. When getting a DSCR loan whose credit score is the lender going to use? Will they require all members or just one?

The highest mid-score of all the guarantors will be used, however, not all LLC members need to be on the loan as guarantor. You really just need one. I'd recommend just having the member with the highest mid score on the loan as guarantor. Certain circumstances may require additional guarantors, however, just one will suffice most times.

[Stacy Raskin]

This varies by lender as different lenders have different guidelines they underwrite to. I've seen everything from a lender using the highest middle mortgage FICO score of the LLC members (as long as the guarantor owns at least 20% of the LLC). Some lenders require 25% ownership. Some lenders will use the lowest of the LLC members. The credit score of the guarantor will impact the rate- more on that below.

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 best. 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.

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. 

[Caitlin Davis]

You will want to structure the LLC operating agreement where the lowest credit scores own the least in the LLC. If it were 3 investors for example, and 2 have low credit scores, you'd want to have them at 10%, 10%, and you at 80% so your higher scores can be used.

[Erik Estrada]

Quote from @Michael Nguyen:

New to this community, heard great things. New investor looking to learn a lot. Thank you in advance. 

As I mentioned I'm a new investor. I am creating an llc with a couple friends as we go into this new endeavor. My questions is. When getting a DSCR loan whose credit score is the lender going to use? Will they require all members or just one?

It depends on the lender and the way the OA is set up. if it is only a 2 member LLC and both members have 50/50 ownership, then both may be required to be a PG. If it is a 4 person LLC that the member with over 21% ownership may qualify to be the only PG.

[Robin Simon]

Quote from @Michael Nguyen:

New to this community, heard great things. New investor looking to learn a lot. Thank you in advance. 

As I mentioned I'm a new investor. I am creating an llc with a couple friends as we go into this new endeavor. My questions is. When getting a DSCR loan whose credit score is the lender going to use? Will they require all members or just one?

 As others have noted, its going to depend on the lender and going to be differentiated.  Its a tough subject because logically, they are joint and several guarantys so rationally a 100% guaranty from each of two people (one 740 one 680 for example) is ALWAYS going to be better than just one 100% guaranty from someone at 740 (so it wouldn't make sense to have a better rate for the latter)

The problem is that there is fraud and "straw borrowers" out there where someone who is not involved in the property signs on to boost score and terms - so many DSCR Lenders in response either do the "non-rational" thing and price to the lower to avoid the fraud or use the higher of the two (and either be a little loose with things or just stay vigilant on any funny business)

[Michael Nguyen]

Thank you to everyone that replied! You all have been extremely thorough and helpful. I look forward to maybe connecting with some of you in the near future. I greatly appreciate everyones time and contribution to this community.