DSCR Cash Out Refi Questions

[Tyler Rabanus]

Hi everyone,

This is my first time posting and I had a question regarding DSCR cash out refinancing:

Are the DSCR loan amounts calculated strictly on the debt service ratio or does an appraisal come in to play?

Reason for question: If i were to purchase a SFH for $75k and spend roughly $175k renovating the 3 bedroom home and converting a massive garage into two 1 bedroom apartments, I believe the property would be still appraise for about $220k. The combined revenue as LTRs, however, would be about $3000/month. If I assume a 1.25 ratio, this scenario would allow me recover more capital than a conventional mortgage.

Please let me know your thoughts. Thanks!

[Ash Hegde]

Hey Tyler, the appraisal will still come into play. There are two pieces to the loan calculation - loan to value (needs appraisal), and debt service coverage ratio (rental income vs. mortgage). Even with high rents, you won't be able to take more than 75-80% of the appraised value out. 

[Brandon Croucier]

Depends on your goal, we are still looking at 75-80% Cashout of the appraised value on DSCR.

[Tyler Rabanus]

Thanks for clearing that up. Definitely changes the analysis! 

[Kristen L Garner]

Hey Tyler, depending on your credit, the max LTV for the cash out will be 75-80%. The new appraised value will be used for the LTV calculation. The DSCR ratio is calculated by taking the rental amount (either from a lease or the 1007 page of an appraisal) divided by the new monthly PITI mortgage. If you can hit 1.25+ you will get the best rates. But there are products that go all the way down to .75+ ratio and even no ratio. To have access to the most DSCR options you will want 6 months seasoning. You can refinance sooner than that but you'll need to paper trail all of the improvement costs that lead to the increase in value.

[Jonathan Taylor]

@Tyler Rabanus the numbers on this deal don't pencil. If you are buying an SFR for 75k, put 175k into the deal (total cost is 250k) and it appraises for 220k, you are negative 30k before any loans are considered. This does not read as though its a smart investment on the surface, and secondly, there isnt a lender I know of that will lend on renovations that exceed the purchase price, especially a renovation that is 2.3 times the purchase price. Your mind is in the right value add space but this isnt a deal.

[Tyler Rabanus]

@Jonathan Taylor yea I agree this deal will not work and I will end up passing on it. I was trying to come up with some ideas to up the cash flow. Thanks for the response!!

[Erik Estrada]

Quote from @Tyler Rabanus:

Hi everyone,

This is my first time posting and I had a question regarding DSCR cash out refinancing:

Are the DSCR loan amounts calculated strictly on the debt service ratio or does an appraisal come in to play?

Reason for question: If i were to purchase a SFH for $75k and spend roughly $175k renovating the 3 bedroom home and converting a massive garage into two 1 bedroom apartments, I believe the property would be still appraise for about $220k. The combined revenue as LTRs, however, would be about $3000/month. If I assume a 1.25 ratio, this scenario would allow me recover more capital than a conventional mortgage.

Please let me know your thoughts. Thanks!

 Hi Tyler, 

The value and the rental income does come into play with a DSCR loan. Lenders will finance up to 80% of the appraised value, so if the value does come in lower, that will result in a lower loan amount. Likewise, if the rents appraise lower on the 1007, most lenders will use the highest of the lease agreement or 1007 as long as there is no more than a 25% variance. If the market rents are significantly lower than the lease, then most lenders will use the lowest of the two, resulting in a lower loan amount.

Seasoning also comes into play if you are looking to use the new value. Most DSCR lenders will require a minimum of 90 days seasoning to qualify for a cash out refinance on the new appraised value.

There is a workaround this with a lower seasoning requirement as long as 100% of the cost (PP + Rehab) does not exceed 75% of the new appraised value. If this is the case then you can go up to 75% LTV on the new appraised value with less than 90 days seasoning.

[Jonathan Taylor]

@Tyler Rabanus your analysis was in the right mindset (covert the garage, renovate to add value), just this property was not working. Keep at it. You'll get there. 

[Robin Simon]

Quote from @Tyler Rabanus:

Hi everyone,

This is my first time posting and I had a question regarding DSCR cash out refinancing:

Are the DSCR loan amounts calculated strictly on the debt service ratio or does an appraisal come in to play?

Reason for question: If i were to purchase a SFH for $75k and spend roughly $175k renovating the 3 bedroom home and converting a massive garage into two 1 bedroom apartments, I believe the property would be still appraise for about $220k. The combined revenue as LTRs, however, would be about $3000/month. If I assume a 1.25 ratio, this scenario would allow me recover more capital than a conventional mortgage.

Please let me know your thoughts. Thanks!

The loan amount will typically be determined by appraisal (LTV - loan to value ratio) - but your qualification will also be based on other metrics like you mentioned - DSCR ratio, FICO and some other factors. Check out these two articles that provide a good overview of the factors that affect qualification and loan amounts:

DSCR Loans: What Are They And How To Get The Best Terms

https://www.biggerpockets.com/...

DSCR Loans: How To Use Pro Strategies To Save More And Make More

https://www.biggerpockets.com/...

[Stacy Raskin]

An appraisal is used to calculate the loan to value / LTV. Best rates are given that have a DSCR ratio of 1 or for some lenders, 1.25. Some lenders use the lower of the actual rents (if rented) and the appraiser market rent survey to calculate the DSCR ratio. Some lenders use the higher of the two.

More info 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

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. 

[Caroline Gerardo]

Most hit all the bullet points excepting:

Spending $175 on renovation and adding square footage or unit count does NOT miraculously convert to valuation. You need comparable sales BEFORE you spend $175 or the appraisal will come low to your expectations.

[Colin McMahon]

Hey @Tyler Rabanus

DSCR loan amounts consider both the debt service coverage ratio and the appraisal value. The property's income ($3000/month) and the appraisal value ($220k) are both crucial. With a 1.25 DSCR, lenders will calculate the maximum loan amount based on the lesser of the two. Given your scenario, you might recover more capital with DSCR due to the higher rental income, but as other lenders have advised, your max will be 75-80 LTV.

Hope this helps! Happy to run the numbers for you. Feel free to DM for more info. 

[Robin Simon]

Quote from @Caroline Gerardo:

Most hit all the bullet points excepting:

Spending $175 on renovation and adding square footage or unit count does NOT miraculously convert to valuation. You need comparable sales BEFORE you spend $175 or the appraisal will come low to your expectations.

 Great point here