"Self-Employed in Charleston, SC: DSCR Loans for New Construction on a Triplex

Member since 2022 · 22 posts · 5 votes

3y

I have seen a few DSCR and Non-Qm, Construction programs, most of them are not super great, but I guess they get they job done and I think there is maybe a place for them as a short-term option.

Here are some specs (based off of my experience):

Rates are higher so today they start at 8.75% and rate add ons for occupancy, number of units and doc type (full, DSCR and Bank statement)

Fees are higher, some have 3% in points on the loan for loan administration and lender fees for loans under $1 million, 2% pts for loan amounts over $1 million. If you work with a broker, then you might have to add any borrower paid comp they earn on the loan.

You don’t lock the loan until 60 days before completion of the construction.

Minimum Credit score is 680. Up to $2 million loan size with exceptions to $3 million.

Investment is 80% Max LTV and can go down based on, number of units, credit score and doc type.
Minimum DSCR 1.0

6 months Reserve for loans up to $1 million, 9 months for loans from $1 to $2 million.

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Jabari Seabrook

OP

Realtor · Charleston, SC · Member since 2017 · 12 posts · 2 votes

3y

@Matthew Gaddis

Thank you for your insights on DSCR and Non-QM construction loans! Your experience sheds light on the pros and cons of these loan options, and it's good to know that they can serve as a short-term solution, albeit with higher rates and fees.

I appreciate you sharing the specific specs you've encountered, including the starting rates at 8.75% and the additional fees for loan administration and lender fees. It's also helpful to know about the credit score requirements, maximum loan sizes, and the factors that can affect the investment and LTV ratios.

Your knowledge in this area is impressive! I wanted to ask if you could recommend any lenders that you've had a positive experience with for DSCR and Non-QM construction loans. Sharing your suggestions on the Bigger Pockets forum would be a game-changer for other members looking for financing options for their new construction projects.

Once again, thanks a bunch for taking the time to provide such valuable information. I'm eager to hear your thoughts on any lenders you'd recommend for these types of loans.

Cheers

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Dennis Muno

Lender · Denton, TX · Member since 2023 · 349 posts · 80 votes

3y

Quote from @Jabari Seabrook:

BP Community,

In this blog post, I'd like to discuss my situation as a self-employed individual seeking financing for a new construction project on a triplex in Charleston, SC. Despite having a credit score over 700, local banks require a consistent income of $10,000 per month for the past two years, which doesn't align with my variable income as a business owner. However, I've come across the concept of DSCR (Debt Service Coverage Ratio) loans, which could potentially provide an alternative solution for financing new construction projects.

To provide a full picture, here are some additional details: I already own the lot for the new construction, which has a balance of $25,000 and an estimated value of around $175,000. Each unit in the triplex, once completed, is projected to rent for $2,500 per month, totaling $7,500 in monthly rental income. The completed triplex is expected to appraise for approximately $800,000.

Given these circumstances, I'm seeking advice and insights from fellow investors who have utilized DSCR loans specifically for new construction projects. Are there specific lenders or loan programs that are more accommodating to self-employed individuals with variable income, even with a credit score above 700, for new construction endeavors? What steps should I take to improve my chances of securing financing for this new construction triplex, considering my ownership of the lot and the projected rental income? Additionally, are there any potential downsides or considerations I should be aware of when opting for a DSCR loan for new construction in the Charleston, SC area?

I greatly appreciate your expertise and insights! Your experiences and guidance will be instrumental in helping me navigate this financing challenge and move forward with my real estate investment goals related to new construction.

Thank you in advance for your valuable input!

I would say given your condition as self employed, a DSCR seems the best option. Why, most other loans will usually require some stable income and may give you a higher rate/unfavorable terms since you won't have predictable income.

DSCR loans are qualified based on the amount of income the property will make, not your personal income. You get qualified for a DSCR loan based on the DSCR ratio of the subject property.

DSCR ratio=monthly rental income/monthly PITI(loan principal and interest, taxes and insurance). Example:So if rent total is $1500 and monthly PITI total is $1000, your PITI ratio=$1500/$1000=1.5

Lenders usually lend to anyone with a DSCR ratio of 1 and above.

DSCR loans will require reserves and rates will usually be 1% higher than conventional and government loans because this is an investor loan.

I would recommend you contact a mortgage broker and ask them to get you multiple DSCR loan offers. The more you are able to compare, the better DSCR deal you could find.

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Jared RineBusiness Member

Lender · Sacramento, CA · Member since 2009 · 1k+ posts · 277 votes

3y

@Jabari Seabrook..I appreciate your lengthy and detailed post, however please take things with a grain of salt, even including what I'm going to tell you. I'd agree that DSCR or some type of non-qm program (p/l only, 1099 only, etc) with DSCR likely being in the forefront.

Full disclosure, I'm a mortgage broker in CA and based on what I'm quoting (TODAY), rates are definitely NOT starting at 8.75% unless you're talking to the wrong mortgage broker. Obviously this will be dependent upon certain factors as some of the responders mentioned, but even at higher LTVs, you should not be getting to this range unless you absolutely have to.

You mentioned the completed value ~$800,000. What do you owe or will be owned on the project? Are you doing the project all cash? When will it be finished?

It'd be good to know what type of LTV the refinance will be at.

I'd recommend that you work on getting your credit score as high as possible. Most lenders do want to see above 680, but there are lenders out there who do DSCR loans with lower credit borrowers.

If you need more info, feel free to PM.

Jared Rine United Lending Partners53 Reviews

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Tony Severance

Lender · Fort Worth, TX · Member since 2022 · 88 posts · 37 votes

3y

@Jabari Seabrook Construction loans used to build investment properties are not very common, unless you are in the hard money space. There are some Non-QM lenders out there that will do these as bridge loans to construct the dwelling, but the max LTV is usually 65% of the ARV (not really a repair, but total value at completion of construction). Rates will also most likely be in the double digits for construction loans. They are also dependent on prior experience at building from the ground up. If you do not have experience doing this in the past, I suggest you go to a hard money lender. Then, when the construction is complete, refinance out of either the non-QM construction loan or the hard money loan into permanent financing, whether that is a DSCR or other type of long term loan.

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Caroline Gerardo

Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes

3y

$175000 value of lot minus $25000 you have $150000 paper equity you need $210000 to make this work at a minimum if you can qualify for 75% loan to value. Do you have another $60000 to put into the project? Do you have other $$ cash for reserves?

You cannot be owner builder unless you go hard money and hope to get a permanent loan after completion. Hard money subjects you to whatever the terms and rates are available when you are 100% completed. Can you risk that? If you go hard money you need more cash as they may only loan 65% of the $800000 plus the cost to do two loans (the construction and the take out +$40000). Hard money you need more money $ maybe $190000 cash on top. Project (if you don't have plans specs costing exact today...) will take three years. Big unknown about rates and terms that will be out there in three years.

PITI today would be about $5800 so your proposed rents sound good, but unknown if accurate what will the square footage of the units be when complete?

Do you have plans, specs, cost breakdown completed? You talked to planning desk about your proposal and is contiguous with the block and neighborhood? If not give yourself 18 months to get all this together. You front the money to the architect and engineering reports etc. That money paid you can use as part of your cash in the deal but you need to keep exacting records.

Checks get doled out to contractor and you as you progress. Do you live close enough to monitor progress and continue doing your job (as in work 70 hours)? Or is contractor trusted and experienced to run with the deal? Contractor wants his profit as well so add that into your costs.

Charleston is a great market. I would say rent range is $1200- $2400 so not sure how large your units will be or the location but those numbers are the crux of qualifying to the permanent loan.

Construction to permanent/ Ground up/ hard money to permanent are your general choices.

Construction has a mean learning curve. Be ready and it can be rewarding.

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Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

3y

Quote from @Jabari Seabrook:

BP Community,

In this blog post, I'd like to discuss my situation as a self-employed individual seeking financing for a new construction project on a triplex in Charleston, SC. Despite having a credit score over 700, local banks require a consistent income of $10,000 per month for the past two years, which doesn't align with my variable income as a business owner. However, I've come across the concept of DSCR (Debt Service Coverage Ratio) loans, which could potentially provide an alternative solution for financing new construction projects.

To provide a full picture, here are some additional details: I already own the lot for the new construction, which has a balance of $25,000 and an estimated value of around $175,000. Each unit in the triplex, once completed, is projected to rent for $2,500 per month, totaling $7,500 in monthly rental income. The completed triplex is expected to appraise for approximately $800,000.

Given these circumstances, I'm seeking advice and insights from fellow investors who have utilized DSCR loans specifically for new construction projects. Are there specific lenders or loan programs that are more accommodating to self-employed individuals with variable income, even with a credit score above 700, for new construction endeavors? What steps should I take to improve my chances of securing financing for this new construction triplex, considering my ownership of the lot and the projected rental income? Additionally, are there any potential downsides or considerations I should be aware of when opting for a DSCR loan for new construction in the Charleston, SC area?

I greatly appreciate your expertise and insights! Your experiences and guidance will be instrumental in helping me navigate this financing challenge and move forward with my real estate investment goals related to new construction.

Thank you in advance for your valuable input!

Hey Jabari

Welcome to BP.

If I'm reading your post correctly, you're looking for ground up construction and then end financing. DSCR won't work on the construction part, but it will work once the property is stabilized. The construction piece is a separate loan that involves the acquisition funds, building schedules and subsequent draws when the work is completed.

To make sure you secure financing, be solid on your numbers (ARV, rental amounts, construction figures) and keep working on your credit score.

Stephanie

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"Self-Employed in Charleston, SC: DSCR Loans for New Construction on a Triplex

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