DSCR out of a DSCR?

[Colleen A Levitt]

About 6 months ago we purchased a duplex using a DSCR loan. The original intention was to do a light cosmetic rehab and rent it out. We put 20% down at 8.25% on a property with a $136k purchase price. Loan is just over $108k. We could have rented it out for about $1600/mo. We decided to do a full rehab to get nearly double the rent ($2900)and increase the ARV to $260k. Can we DSCR out of this to get our money back out or will I need to sell it to get our $136k total investment out?

[Robin Simon]

Quote from @Colleen A Levitt:

About 6 months ago we purchased a duplex using a DSCR loan. The original intention was to do a light cosmetic rehab and rent it out. We put 20% down at 8.25% on a property with a $136k purchase price. Loan is just over $108k. We could have rented it out for about $1600/mo. We decided to do a full rehab to get nearly double the rent ($2900)and increase the ARV to $260k. Can we DSCR out of this to get our money back out or will I need to sell it to get our $136k total investment out?

You should be able to do a DSCR Loan for the refinance - you will probably want/need to have both units rented out by close of the new loan though

[David M.]

@Colleen A Levitt Shouldn't be an issue to refi with a dscr.   However, check for your prepayment penalty on your current dscr.  That will be the main issue in my mind.  remember, these are NOT conforming loans, so all the consumer protections one might be used to having aren't there.

[Ravi P.]

@Colleen A Levitt

You can always pay off or refinance the loan. The issue is cost. Most DSCR loans come with a prepayment penalty that is typically 5% for the first year, 4 points for the second, 3, 2, or 1 pts for each year. So the $108K loan will cost you 5 pts. or $5,400 to pay it off in the first 12 months.

You will also have to factor in the closing cost for the new loan.

You need to do a cost-benefit analysis to determine if it's worth it.

[Ko Kashiwagi]

Hi Colleen,

As long as both of the units are fully rented, there should be no issue getting another DSCR loan. What is your prepayment penalty on this current loan? If it's a standard step down, you may take a big hit on points.

[Colleen A Levitt]

Quote from @Ravi P.:

@Colleen A Levitt

You can always pay off or refinance the loan. The issue is cost. Most DSCR loans come with a prepayment penalty that is typically 5% for the first year, 4 points for the second, 3, 2, or 1 pts for each year. So the $108K loan will cost you 5 pts. or $5,400 to pay it off in the first 12 months.

You will also have to factor in the closing cost for the new loan.

You need to do a cost-benefit analysis to determine if it's worth it.

 This is very helpful! We have a 3-2-1 paydown. A lot to think about. Definitely a chunk of change I don't want to pay, but having my cash back out to do another deal might be worth it...

[Amish Patel]

Colleen just curious. Who did you use for your DSCR? I'm currently using a lender working on a 360k townhouse with 50% LTV. Running into more paperwork issues. Like lender having issues getting HOA docs and asking me instead of title or agent. Asking me for LLC docs few times over and quoting on a rate sheet that was for single family and not town house. We need to close in 1 week and worst case I may need to buy all cash and refi to a different lender losing my property inspection fee the lender charged.

[Andrew Zamboroski]

Quote from @Colleen A Levitt:

About 6 months ago we purchased a duplex using a DSCR loan. The original intention was to do a light cosmetic rehab and rent it out. We put 20% down at 8.25% on a property with a $136k purchase price. Loan is just over $108k. We could have rented it out for about $1600/mo. We decided to do a full rehab to get nearly double the rent ($2900)and increase the ARV to $260k. Can we DSCR out of this to get our money back out or will I need to sell it to get our $136k total investment out?

 As other colleagues have said, of course you can refi into one. You 3-year stepdown will be a little painful, but, it could be worth it if the funds are needed. Is the property also in the Detroit area? We’re based in the area, so I am always curious to see good projects! It sounds like you did a lot of work, congrats on getting it finished!

[Andrew Zamboroski]

Quote from @Amish Patel:

Colleen just curious. Who did you use for your DSCR? I'm currently using a lender working on a 360k townhouse with 50% LTV. Running into more paperwork issues. Like lender having issues getting HOA docs and asking me instead of title or agent. Asking me for LLC docs few times over and quoting on a rate sheet that was for single family and not town house. We need to close in 1 week and worst case I may need to buy all cash and refi to a different lender losing my property inspection fee the lender charged.

Is this a townhouse or condo? Either way, sorry to hear about your scenario! It may be worth while connecting them with the HOA. Sometimes HOA’s can be fun to deal with though on the other side.

[Scott Wolf]

Quote from @Colleen A Levitt:

Quote from @Ravi P.:

@Colleen A Levitt

You can always pay off or refinance the loan. The issue is cost. Most DSCR loans come with a prepayment penalty that is typically 5% for the first year, 4 points for the second, 3, 2, or 1 pts for each year. So the $108K loan will cost you 5 pts. or $5,400 to pay it off in the first 12 months.

You will also have to factor in the closing cost for the new loan.

You need to do a cost-benefit analysis to determine if it's worth it.

 This is very helpful! We have a 3-2-1 paydown. A lot to think about. Definitely a chunk of change I don't want to pay, but having my cash back out to do another deal might be worth it...

It makes sense to run the numbers, but will depend on the appraisal. If you want a quote to help, I'm happy to provide one. Most lenders are capped at 75% LTV on a cash out refinance, so something to think about while you do the math.

[Drew Sygit]

@Colleen A Levitt check if you have a prepay penalty and what the seasoning requirements would be for the new loan to recognize the new value.

[Brittany Minocchi]

Assuming the ARV you mentioned is accurate, at 75% LTV you'd be able to pull enough equity to cover your existing payoff, refi costs and walk away with a good chunk of cash in your pocket. If you don't need the extra money at closing and just want to pay off your current loan in hopes of a better rate, you could consider a rate term refi instead.

If you have a 3-2-1 prepay, you'd lose $3,240 paying off your current DSCR (this would apply to a refinance OR a sale). If you're keeping the property and renting it for $2,900/mo, you'll make that $3,240 back pretty quickly. I'd then look at the interest savings vs. the cost of the refinance + penalty and see how long it would take you to recoup those costs. 

I hope that helps :) 

[Jay S.]

Yes, you can do DSCR to get your money back. Main thing to watch out is DSCR Ratio. It will depend on Lender if they take Rents from Appraisal (1025) or Rents from your existing Tenants. Some Lenders can even take just the Lease Agreement. For 2 units; DSCR can go to 85% LTV or 15% down for purchase OR 75% LTV for Cash out in your scenario.

[Erik Estrada]

Quote from @Colleen A Levitt:

About 6 months ago we purchased a duplex using a DSCR loan. The original intention was to do a light cosmetic rehab and rent it out. We put 20% down at 8.25% on a property with a $136k purchase price. Loan is just over $108k. We could have rented it out for about $1600/mo. We decided to do a full rehab to get nearly double the rent ($2900)and increase the ARV to $260k. Can we DSCR out of this to get our money back out or will I need to sell it to get our $136k total investment out?

 Hi Colleen, 

Yes you can refinance an existing DSCR loan. However you should consider if your loan has a Pre Payment Penalty. This Penalty is applicable to both a refinance and a sale. Typically most DSCR lenders follow a traditional 5, 4, 3, 2, 1, PPP or a 3,2,1 PPP. This essentially means that if you sell or refinance your property within the first 5-3 years, you will be penalized at closing. For example if you sold on year 1 on a 5 year prepayment penalty, the lender would hit you with 5% of the principal balance.

[Jacqueline Wright]

Hi Colleen,

You may be able to refinance your DSCR loan using the property's increased value after the rehab. If the ARV has risen to $260k and you're renting it out for $2900/month, you can likely qualify for a higher loan amount.

Here are some key points to consider:

1. Loan-to-Value (LTV): A typical DSCR refinance will allow you to borrow up to 75-80% of the property's ARV, so for a $260k property, you might qualify for a loan of $195k to $208k, which could help pull out most or all of your original investment.
2. Debt Service Coverage Ratio (DSCR): Since you're renting for $2900/month, the loan payment will need to be covered comfortably by that rent. Lenders typically look for a DSCR of at least 1.25, meaning your monthly rent should cover the loan payment plus 25% more.
3. Seasoning: Some lenders may require a waiting period of 6 months or more before refinancing, so check with your lender to see if this is an issue.

If the numbers align, refinancing could allow you to recoup your $136k investment without selling. It’s worth reaching out to your lender to discuss the specifics and get a quote based on your improved property value.