How to bypass DSCR and get a conventional loan!

[Zach Wain]

DSCR loans are a fantastic tool for investors and can help them add rental properties when there is not enough qualifying income to get a conventional loan. But, as a Mortgage Broker we look for any and all ways to save our clients money. So if there is a way to gameplan or strategize a way for an investor to be able access conventional loan rates instead of DSCR loans – that means a lower monthly or more buying power for the investor. Plain and Simple!

As most of you know, DSCR loans have less income documentation than conventional loans. They only look at whether or not the property cash flows. Most DSCR loan programs will use long term rents, and various lenders have different cash flow ratios that they accept. With 15% downpayment some want positive cash flow. With 20%-25% some may consider slightly negative cash flow. STR analysis is starting to come into play as well.

Pros – cash flow is the only income requirement/documentation needed. You can close and hold title in an LLC. 5-8 unit and other unusual property types are acceptable.

Cons – higher rates, many DSCR loans have Pre payment penalties

Every buyer has a different looking profile, so one glove does not fit all. But, I am going to talk about 3 common strategies for buyers to be able to turn their income scenario into one that the conventional mortgage world will like.

• 1) For home buyers with significant cash assets – Open a Living Trust! This path takes a little bit of cash/reserves, but it is the easiest way to turn someone with no usable income into an A+ profile for a conventional loan. If Bob Smith opens a Living Trust, the Bob Smith Living Trust, and has $200,000 of cash, stocks, bonds, or other liquid assets put into that account, we are off to the races. The Bob Smith Living Trust can give a monthly distribution of $5,000 to Bob Smith the person and we can use that as qualifying income for a conventional loan. EASY! But this option takes a decent amount of cash
• 2) Self employed buyers – The old status quo of lenders needing 2 years of personal and business bank statements is not always the case anymore. Maybe self employed borrowers have ups and downs year to year and that caused problems in underwriting. When we run our pre approvals, the pre approval software will tell us if 1 year or 2 years of tax returns is required. This makes or breaks deals more often than buyers, realtors, and most loan officers realize. The point, have an in-depth analysis by your loan officer and make sure they are looking for this type of approval. Many lenders can do this, but most do not focus on it!
• 3) For buyers that are adding multiple properties in the same year – STR's have become more and more popular but the conventional lending world struggles to use STR income until it hits your tax returns. WHY? Because the lender has no idea what your expenses and write offs will be. Revenue is one piece of the puzzle, and expenses are the other so we can tell what your true profits are. So, if you are planning on buying multiple STR's in a single year, 2022 for example, they will not show on your tax return until you file you 2022's return in early/mid 2023. If your debt to income ratio is tight and you can qualify for more and more conventional loans if we can use rental income, what should you do? Consider starting off with Mid-long term rentals for the first 6-12 months. If you get a lease on a property you bought in June, we can use that rental income. So, when you buy another home in Oct, we have rental income to use. Then get a lease on the home you bought in Oct, so we can use that rental income for the next home you are buying in Dec. When 2023 hits, flip them to STR's

Every scenario is different, so there are many other approaches to consider. If you have a great Loan Officer, consult with them. Game planning goes a long way to ensure maximum success. If you do not have a great Loan Officer, find one!