DSCR loan question and help

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DSCR loan question and help

Michelle Phimmasone
Member since 2021 · 18 posts · 3 votes

We are purchasing a beach condo STR purposes. Our broker had offered us these loan options:

20% down at 8.5% interest, $65000 down, $1999 monthly

25% down at 7.5% interest, $81500 down, $1704 monthly

We wanted to keep as much cash in the bank as possible so we went with the 20% down loan. They started working on it last month with a closing date of July 25. Just yesterday broker lets me know that the monthly isn't meeting the DSCR ratio and is short by around $49. He asked if we could do 23% down...that would be an additional $9750 cash upfront downpayment. I asked if buying just one point (cost maybe be $2600) to lower interest rate to 8.25% would be enough to meet the ratio. Also asked if we did a higher down like 25%, would we be offered a lower interest rate like before. He responded that he would check the costs of buying down the interest rate. Im feeling uneasy, with being told that we'd need more downpayment last minute but at the higher interest rate doesn't seem fair? If we had known earlier we would have taken the other option. Is there anything else we can ask, or no other options but to buy points or pay the additional $10K down? 

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Zach Wain
Scottsdale, AZ · Member since 2019 · 435 posts · 248 votes
4y

I am expecting a ton of volatility in the coming months for DSCR loans. Some lenders are going out of business, Fed rate hikes could impact their pricing moreso than conventional/MBS priced products. Be ready for guideline changes, LTV changes, FICO changes, and pricing to swing wildly.

The secondary market for these DSCR loans is drying up, and the cost of holding these loans on the lender warehouse lines is super expensive.

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  • Andrew Garcia
    Lender · Charlotte, NC · Member since 2022 · 739 posts · 410 votes
    4y

    Hi @Michelle Phimmasone, the 25% down option seems like the best option if it is available.

    It is essentially a 21.45% ROI.

    It may not be available and you may have to buy down the rate.

    The broker likely did not know that it would not meet the DSCR ratio but if it was tight, they should have told you.

    I wish you the best of luck and I hope it works out. I am sorry that you are stuck in this situation.

    Please let me know if I can be of any assistance.

    0Reply
  • Brandon BeardtPro Member
    Lender · La Crescenta, CA · Member since 2021 · 261 posts · 157 votes
    4y
    Quote from @Michelle Phimmasone:

    We are purchasing a beach condo STR purposes. Our broker had offered us these loan options:

    20% down at 8.5% interest, $65000 down, $1999 monthly

    25% down at 7.5% interest, $81500 down, $1704 monthly

    We wanted to keep as much cash in the bank as possible so we went with the 20% down loan. They started working on it last month with a closing date of July 25. Just yesterday broker lets me know that the monthly isn't meeting the DSCR ratio and is short by around $49. He asked if we could do 23% down...that would be an additional $9750 cash upfront downpayment. I asked if buying just one point (cost maybe be $2600) to lower interest rate to 8.25% would be enough to meet the ratio. Also asked if we did a higher down like 25%, would we be offered a lower interest rate like before. He responded that he would check the costs of buying down the interest rate. Im feeling uneasy, with being told that we'd need more downpayment last minute but at the higher interest rate doesn't seem fair? If we had known earlier we would have taken the other option. Is there anything else we can ask, or no other options but to buy points or pay the additional $10K down? 



    Hi Michelle,

    Sorry to hear that you're having to go through with this towards the last stage of the process. It sounds like paying 1 point to buy down the interest rate would be your best bet in order to meet the DSCR, as it seems the most cost effective strategy for your goal (keep as much cash in the bank). If you really think about it, it's either $2,600 out of your pocket to the lender or $9,750 back in your pocket, but as equity. Hope that makes sense. When it boils down to tight ratio's on purchases like this, I always double check the taxes and make sure that the estimated annual amount is correct. This could lead to over estimated monthly taxes and hurt the DSCR ratio. Verify the actual tax rate for the property (Current assessed value/current annual tax amt) and multiply it by the new purchase price (since this will be the new assessed value). That should give you the new annual tax amount. Your broker should be able to do this themselves to confirm. Not sure if it'll help in this situation necessarily, but definitely something to look into since every dollar counts!

    [email protected]818-726-2418
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  • Timothy Hero
    Lender · United States · Member since 2020 · 1k+ posts · 499 votes
    4y
    23% down for 8.5%? My highest DSCR lender is 7.5%. Most are 6.8% range.

    You're being robbed, unless your credit is below 660.
    1Reply
  • Zach Wain
    Scottsdale, AZ · Member since 2019 · 435 posts · 248 votes
    4y

    I am expecting a ton of volatility in the coming months for DSCR loans. Some lenders are going out of business, Fed rate hikes could impact their pricing moreso than conventional/MBS priced products. Be ready for guideline changes, LTV changes, FICO changes, and pricing to swing wildly.

    The secondary market for these DSCR loans is drying up, and the cost of holding these loans on the lender warehouse lines is super expensive.

    1Reply
  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    4y

    @Michelle Phimmasone This is common with a lot of DSCR lenders. Many will overpromise and underperform. There are actually options that do not even consider DSCR and have similar rates. I will PM you.

    [email protected]818-269-7983
    LuxePrivate Investments LLC 570 Reviews
    WebsiteView Page
    1Reply
  • Carini Rochester
    Investor · Rochester, NY · Member since 2016 · 576 posts · 358 votes
    4y

    I recently got quoted 20% down, 6.1% interest. I would talk to a couple other lenders.

    0Reply
  • Zach Wain
    Scottsdale, AZ · Member since 2019 · 435 posts · 248 votes
    4y
    Quote from @Carini Rochester:

    I recently got quoted 20% down, 6.1% interest. I would talk to a couple other lenders.

    @Carini Rochester - when did you get a 6.1% DSCR loan with 20% down? And how many discount points? That sounds 5 months or older... Rates are much higher with every single DSCR lender we have access to. Even 20% down conventional rental is about 6.1% today, DSCR has higher risk, difficulty selling those loans on the secondary market, so the rates are much higher.

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  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    4y
    Quote from @Carini Rochester:

    I recently got quoted 20% down, 6.1% interest. I would talk to a couple other lenders.


    Close it fast before they go out of business. Most DSCR loans are in the 6.99 to 7.99 range. 6.1 is below the floor for most lenders right now.

    1Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y
    Quote from @Carini Rochester:

    I recently got quoted 20% down, 6.1% interest. I would talk to a couple other lenders.


     They will change again during UW final approval. 6.1% is 2019 rate per-se.

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y
    Quote from @Zach Wain:

    I am expecting a ton of volatility in the coming months for DSCR loans. Some lenders are going out of business, Fed rate hikes could impact their pricing moreso than conventional/MBS priced products. Be ready for guideline changes, LTV changes, FICO changes, and pricing to swing wildly.

    The secondary market for these DSCR loans is drying up, and the cost of holding these loans on the lender warehouse lines is super expensive.


     Agree, as inventory is rising fast from the flipper.


    But can you explain more about the secondary market for DSCR loan ? very interesting to me. This could be the root cause of another crash if not managed well.

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y
    Quote from @Michelle Phimmasone:

    We are purchasing a beach condo STR purposes. Our broker had offered us these loan options:

    20% down at 8.5% interest, $65000 down, $1999 monthly

    25% down at 7.5% interest, $81500 down, $1704 monthly

    We wanted to keep as much cash in the bank as possible so we went with the 20% down loan. They started working on it last month with a closing date of July 25. Just yesterday broker lets me know that the monthly isn't meeting the DSCR ratio and is short by around $49. He asked if we could do 23% down...that would be an additional $9750 cash upfront downpayment. I asked if buying just one point (cost maybe be $2600) to lower interest rate to 8.25% would be enough to meet the ratio. Also asked if we did a higher down like 25%, would we be offered a lower interest rate like before. He responded that he would check the costs of buying down the interest rate. Im feeling uneasy, with being told that we'd need more downpayment last minute but at the higher interest rate doesn't seem fair? If we had known earlier we would have taken the other option. Is there anything else we can ask, or no other options but to buy points or pay the additional $10K down? 


     From mathematical formula:

    Here's the first month ratio from amortization table for the first month for principal and interest rate payment
    for loan of $100k:

    CP:cum. principal LB=loan balance.

    Interest rate of 3%
    interest/principal
    $250:$171 ratio principal to interest : 40%,first principal $177,when is CP>LB=month 220
    5%
    415:120 ratio principal to interest : 22%
    6%
    500:99 ratio principal to interest : 16%
    7.5% i:p 100k
    625:75 ratio principal to interest:10% , CP>LB month 220
    8.5%
    708:60 ratio principal to interest 7%

    7.5% i:p 100k with additional principal of $177 every month
    625:75 ratio principal to interest:10% , CP>LB month 128

    Result:
    -Interest rate of 7.5% and 8.5% doesn't make much difference in equity building(diff only 3%), except if you could have interest rate of 3-4%
    - What you should do is simple, just go with interest rate that doesn't require you to add anything upfront.
    - if you add $177 principal payment for every $100k, your equity building is actually faster than 3% without additional principal payment.

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  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    4y
    Quote from @Carlos Ptriawan:
    Quote from @Zach Wain:

    I am expecting a ton of volatility in the coming months for DSCR loans. Some lenders are going out of business, Fed rate hikes could impact their pricing moreso than conventional/MBS priced products. Be ready for guideline changes, LTV changes, FICO changes, and pricing to swing wildly.

    The secondary market for these DSCR loans is drying up, and the cost of holding these loans on the lender warehouse lines is super expensive.

     Agree, as inventory is rising fast from the flipper.
    But can you explain more about the secondary market for DSCR loan ? very interesting to me. This could be the root cause of another crash if not managed well.


    The secondary market.
    A loan is originated with a borrower.  The borrower shows up at the closing table and signs the papers, pays the closing costs and whatever was required for down payment and then the loan funds.  The money for the funding generally doesn't come from the lender and certainly not from the broker that originated it.  The money came from either the lender's warehouse line of credit or from a larger lender that the broker is approved to originate with.  Either way, the loan is funded by someone other than the actual company that originated the loan.  Once the loan is funded, it's typically sold to a servicer (many times right at the  closing table) to collect the monthly payments and pay the taxes and insurance.  Sometimes, the servicer takes a data tape of loans they are servicing and puts them out to bid because their money for servicing is limited.  The loans are broken down by their specific characteristics and put into pools or "traunches".  Some of the loans have higher loan to value that bring less money and some with lower credit score that also bring less money while a loan that has a low ltv and high credit score will bring the cost up.  The risk determines the reward.  Then that pool of loans is turned into a mortgage backed security and the servicer gets them off of their giant warehouse line so they can continue the cycle.  
    The job of everyone in the origination cycle is to get rid of the loan and get paid when doing it.  The originating lender or broker has to originate it to the proper guidelines and interest rate.  If the borrower doesn't qualify, they either find a lender that will buy the loan at a higher interest rate or lower ltv or they don't originate it.  If they do originate it and fund it and they made a mistake, then they may have to service it themselves and that's expensive so they'll sell it off for a significant discount.   Either way, the loan has to be priced correctly for it to be bought and subsequently sold into a pool.  If it turns out that the pool is too low compared to the rest of the loans out there, they won't get bought and the large hedge funds where most of these lenders get their money may do a margin call and if that happens, like it did with Sprout a couple weeks ago, they file Chapter 11 because they are not prepared to pay $100 million dollars to get loan off their warehouse line.
    Hope that helps.  It's an overview and there are a whole bunch of other things that go into it and I'm sure if someone from capital markets read my post they would pull it to shreds, but it's how I would describe the secondary market in layman's terms.  
    Stephanie
    1Reply
  • Zach Wain
    Scottsdale, AZ · Member since 2019 · 435 posts · 248 votes
    4y
    Quote from @Carlos Ptriawan:
    Quote from @Zach Wain:

    I am expecting a ton of volatility in the coming months for DSCR loans. Some lenders are going out of business, Fed rate hikes could impact their pricing moreso than conventional/MBS priced products. Be ready for guideline changes, LTV changes, FICO changes, and pricing to swing wildly.

    The secondary market for these DSCR loans is drying up, and the cost of holding these loans on the lender warehouse lines is super expensive.


     Agree, as inventory is rising fast from the flipper.


    But can you explain more about the secondary market for DSCR loan ? very interesting to me. This could be the root cause of another crash if not managed well.


    Hi Carlos, the secondary market for DSCR loans is so small that I do not think it will have any impact on the market. But, I expect more companies to either pull back, maybe a few more go under, or other forms of volatility. Its a riskier asset, and if the lender does not have big money behind them they might be in trouble. Some companies are run well, others are not. Nothing wrong with a little housecleaning for poorly managed companies.

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