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Jennifer Roberts
  • Rental Property Investor
  • California
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DSCR Loan Vs. Conventional Loan

Jennifer Roberts
  • Rental Property Investor
  • California
Posted Apr 6 2022, 09:54

As a newer investor I'm wondering why I would want to max out my DTI before applying for a DSCR loan? Are there any pros or cons to this? Or why would a lender recommend this? Just for reference, I have a good amount of cash to use as leverage with DSCR and qualify for much less using conventional and we may be looking to move and use a conventional loan for our next personal property within 3-5 years.

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Katherine Blazer
  • Lender
  • Tampa/St. Petersburg/Sarasota, FL
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Katherine Blazer
  • Lender
  • Tampa/St. Petersburg/Sarasota, FL
Replied Apr 6 2022, 10:32

There are a lot of pros and cons to both, and both serve a great role in building a portfolio. 

DSCR can be closed in an LLC; they do not care about your DTI. Cons: they usually have a little higher interest rates and typically have points attached to them. Rates are also based on the DSCR ratio, so make sure you know all expenses ahead of time.

Conventional Investment Loans usually have a little lower rates and are without points. They have to be closed in your personal name and care about your DTI. These only use 75% of expected income to offset your DTI.

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Matthew Crivelli
  • Lender
  • Massachusetts
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Matthew Crivelli
  • Lender
  • Massachusetts
Replied Apr 6 2022, 12:40

DSCR Loans are always more expensive, the rate and closing costs. Currently rates are 6% - 7% across the industry and will go higher. You will also see rates on investment properties go up at banks in the 6% range fairly quickly as well.

The benefits to DSCR? No DTI, taxes, or employment checks so the loan is easier to qualify for and the commercial mortgage doesn't show up on your credit and background reports. The loan will not affect your DTI and there is no cap on how many notes you can have outstanding at one time. Also HIGHER LEVERAGE for purchases and refinances. Last but not least, close times! They will be inside 30 days in most cases.

The main qualifiers,

1. Property has to cash flow 

2. Can't be rural (need to have sale & market rent comps)

3. Credit score matters (700 + for high leverage)

4. You must hold the property under an LLC or CORP

5. Must be rented (or willing to get it rented soon)

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Andrew Postell#2 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
  • Lender
  • Fort Worth, TX
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Andrew Postell#2 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
  • Lender
  • Fort Worth, TX
Replied Apr 6 2022, 16:06

@Jennifer Roberts thanks for posting. Lots of opinions here and some good ones at that. The main thing I want to point out here first is that you should NOT be "maxing out your DTI" with a conventional loan. At least, you shouldn't be working with a lender that sees it that way. Each rental property we purchase we cash flow, right? I mean, that's the point....so hopefully that's what you are doing. So if I cash flow with each property I should look BETTER with the more properties I own. Make sure your lender is counting that rental income to help you qualify. If they aren't, then go to a different lender. None of this "it needs to be on your tax returns" or "seasoned" or anything like that. I need rental income to help me qualify right now. Every time. But even if you do look amazing after each property you own - the conventional side will limit you to 10 loans (there are some exceptions here but for the sake of time let's run with this). So once you hit 10 THEN we do the DSCR loan.

I hope this makes sense but feel free to post more if you like.  Thanks!

Lender Texas (#392627)

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Chris Mason
  • Lender
  • California
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Chris Mason
  • Lender
  • California
ModeratorReplied Apr 6 2022, 16:38

It's interesting watching DSCR get more and more attractive over time, just by the mechanism of DSCR rates/fees/terms barely moving.... meanwhile, Fannie Mae seems to be doing her darndest to "price match" upwards to meet up with DSCR and fist bump. At some point, maybe soon who knows, it's just going to be "pick your poison, rate and terms will be about the same either way... do you want to upload a bunch of paperwork (Fannie) or do you want to pay 1.25 discount points (DSCR)?"

As recently as 6 months ago, there was no comparison. You took Fannie if we could, and DSCR if you had no choice.

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Jill F.
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Jill F.
  • Investor
  • Akron, OH
Replied Apr 6 2022, 16:46
The other thing is , if you are buying a 5+ unit property, then a DSCR loan is really your only option.

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Jennifer Roberts
  • Rental Property Investor
  • California
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Jennifer Roberts
  • Rental Property Investor
  • California
Replied Apr 7 2022, 14:01

@Andrew Postell great info. Thank you! And that is funny because those were the terms he used. And it didn't sound right to me either. Maxing out my DTI? Doesn't sound great.

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Jennifer Roberts
  • Rental Property Investor
  • California
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Jennifer Roberts
  • Rental Property Investor
  • California
Replied Apr 7 2022, 14:03

@Chris Mason great point! Thanks for the reply.

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Jennifer Roberts
  • Rental Property Investor
  • California
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Jennifer Roberts
  • Rental Property Investor
  • California
Replied Apr 7 2022, 14:05

@Matthew Crivelli Thank you! Great explanation!!

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Stephanie P.
  • Washington, DC Mortgage Lender/Broker
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Stephanie P.
  • Washington, DC Mortgage Lender/Broker
Replied Apr 8 2022, 07:16
Quote from @Jennifer Roberts:

As a newer investor I'm wondering why I would want to max out my DTI before applying for a DSCR loan? Are there any pros or cons to this? Or why would a lender recommend this? Just for reference, I have a good amount of cash to use as leverage with DSCR and qualify for much less using conventional and we may be looking to move and use a conventional loan for our next personal property within 3-5 years.

We always recommend using a conventional loan first because it's cheaper, especially if you look at it long term. Having said that, there are so many reasons people don't qualify for conventional financing, it's spawned an entire segment of lending (DSCR):)

No income verification other than the leases, max 60 days seasoning on down payment and reserves (in some cases no seasoning, only source) and no limit on the number of properties you can have financed are three big reasons why DSCR and non-qm in general is the fastest growing segment of mortgage banking.

Hope that helps

Stephanie


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Albert Bui
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Albert Bui
  • Lender
  • Bellevue WA & Orange County, CA
Replied Apr 9 2022, 11:02

Its best to have both so as an investor you can pivot back and forth. Mortgage planning in this area is even more critical because DSCR type loans that qualify purely on the gross market rental income of a property and usually has prepayment penalties (up to 3 years). Some lenders allow for the option to take a higher rate to absorb your prepayment penalties so you get in and get out of a deal quicker or move into less expensive more prime types of capital / money like conventional or commercial financing with out being tied down by unnecessary PPP's or prepayment penalties.

Often times a property is not ready to go into "prime," money and this is when HML (hard money lending), PML (Private money lending), and DSCR (debt service coverage ratio) type loans help you get into properties. The goal is then to improve the property's rental income and value then refinance and transition into a better type of money that allows you to make more cashflow and profits later.

In order to do so, its best to know how to exit or get out of a certain product before you even take on a deal (having multiple options and strategies to do so).

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