DSCR Loan for a first time REI

[Aaron Raffaelli]

As the title suggests, I am just starting to enter the REI world. My first deal looks like it will fall through because the bank doesn't like my work history. (4 months as a union electrician, which the bank considers contract work). I am wondering if any lenders or knowledgeable investors know how feasible it could be to get a DSCR loan as a first-time home buyer/investor. I am 21 with excellent credit and have enough/will have enough for the high down payment they require. I know and am prepared to do all the overhead work necessary to find a property that will qualify, but I just want to know if it is possible in my situation. If so (and even if not), I would love any recommendations to a loan officer in the metro Detroit area.

Thank you in advance,

Aaron Raffaelli

[Stacy Raskin]

There are DSCR loan programs for first time investors. Many DSCR programs require an investor to have a mortgage history- there are some DSCR mortgage programs that will work with investors who are renting- some refer to them as first time home buyers (FTHBs)- DSCR loans are only for investment properties where the owner isn't living there. There are loan programs that will do a 20% down payment with a 680 or above credit score. 

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.