DSCR Loan Vs. Conventional Loan
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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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.
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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@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!
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Lender Texas (#392627)
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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.
@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.
@Chris Mason great point! Thanks for the reply.
@Matthew Crivelli Thank you! Great explanation!!
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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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Broker
- US Commercial
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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Quote from @Andrew Postell:
@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!
Excellent Mr.Postell, just to get my mind clear, basically Lenders helping me with a conventional loan should automatically account future/current rents cashflow to be part of the qualifying conventional loan? The ones that do not for my benefit I shall kick them on their knee caps and run!
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@Joshuam R. ha! Kicking them to the curb is fine but don't take it personally. Often times you are speaking with an "entry level" person who is just reciting what "upper management" has told them to say. We want to work with lenders that count rental income immediately...and some other things as well. Here's the list of questions I would recommend using when speaking with lenders:
Questions for Lenders
- When do you start using rental income to help me qualify? (the answer needs to be immediately)
- When do you start using “After Repair Value” on my property? (also needs to be immediately)
- How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
- What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
- How many loans can I have with you?
- Can I change title to my LLC?
- Do you sell your mortgages?
- What is your loan minimum?
- Can you explain to me what your reserve requirements are?
Thanks!
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Lender Texas (#392627)
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I don't know if the market is changing but recently the conventional seems to be the same as a DSCR in my experience.
Quote from @Matthew Crivelli:I don't know if the market is changing but recently the conventional seems to be the same as a DSCR in my experience.
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)
Quote from @Andrew Postell:
@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!
How is the lender able to qualify the income? Analyzing your bank statements for cashflow? Or showing leases? Or both?
Quote from @Chris Mason:You nailed it. I’m at the point now where it seems that both DSCR and Conventional are about the same and obviously one process is less of a headache. I’m constantly reminded every time I go conventional at how silly Fannie and Freddie requirements are. It’s a complete joke of a process how picky and arbitrary some of these hoops are to jump through.
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.
Quote from @Jason Bobby:
Quote from @Chris Mason:You nailed it. I’m at the point now where it seems that both DSCR and Conventional are about the same and obviously one process is less of a headache. I’m constantly reminded every time I go conventional at how silly Fannie and Freddie requirements are. It’s a complete joke of a process how picky and arbitrary some of these hoops are to jump through.
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.
Jason - I would echo this sentiment!
Quote from @Jason Bobby:Depending on the situation — tax returns and/or leases
Quote from @Andrew Postell:
@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!
How is the lender able to qualify the income? Analyzing your bank statements for cashflow? Or showing leases? Or both?
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Quote from @Matthew Crivelli:
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)
Would love to talk to you soon about your firms DSCR loans. Hope all is well on your end.
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.
HI Jennifer there are pros and cons of conventional.
The first is rate, if rate is better with one then you may be inclined to pursue one versus the other.
Sometimes the property doesnt have high enough rent or the DSCR will be too low and that as a byproduct will cause you to bring in too much money (IE instead of 20% down you have to bring in 30-40% to make the DSCR formula work). In this case if you have high enough personal income (job/active/income) you can use conventional to finance it because conventional financing doesnt go off DSCR, it goes off DTI or debt to income and with DTI calc we dont care if you cashflow or not or if you decide to buy a big looser (negative cashflow) so long as your DTI is 45-50% or lower you'll qualify in most cases (on conventional financing).
For people who have lower personal or active income and lots of other liabilities (like credit cards, cars, student loans) and their DTI is too high, they'll have to focus on using DSCR products mostly because conventional will be nearly off limits to them. However, it doesnt mean you should disregard conventional completely because life is a constant flux and there are periods of time where you might weave in and out of conventional or DSCR and or both might be available.
Its important to work with someone who can help identify those periods of time and how to prepare for them ahead of need. This is the essence of what mortgage planning is when its focused towards real estate investors.
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Lender Georgia (#1780583), Oregon (#1780583), Virginia (#1780583), Florida (#1780583), Oklahoma (#1780583), Colorado (#1780583), Washington (#1780583), California (#1780583), Texas (#1780583), Idaho (#1780583), and Tennessee (#1780583)
- Avenue One Capital Inc
It's important to understand the difference between DTI and DSCR loans, as well as the pros and cons of each.
DTI, or Debt-to-Income, is a ratio used by lenders to determine a borrower's ability to repay a loan based on their current debt obligations compared to their income. The higher your DTI, the more of your income is being used to pay off existing debts, and the less you may be able to borrow for new investments.
DSCR, or Debt Service Coverage Ratio, on the other hand, looks at the potential rental income of an investment property to determine the borrower's ability to repay the loan. Lenders who offer DSCR loans typically require a higher down payment and may have stricter requirements for the borrower's credit score and experience.
Maxing out your DTI before applying for a DSCR loan could potentially help you qualify for a larger loan amount, since your existing debt obligations will not factor into the lender's decision. However, this strategy also carries a significant risk, as it may increase your overall debt load and limit your ability to make other investments or pay off debts in the future.
Additionally, it's important to remember that lenders are primarily concerned with minimizing their own risk, and may recommend maxing out your DTI as a way to increase their chances of receiving repayment. As an investor, it's important to carefully consider your own financial goals and risk tolerance before taking on any new debt, and to work with a reputable lender who can help guide you through the decision-making process.
Lots of pro's and con's to both. I would look at important metrics such as your cash-on-cash return with both loan structures, assuming you can get quotes from both lenders, and go from there.
There are lots of good responses on here for the original post being a year old. I have 4 conventional loans, not sure if I would be able to get to the 10 conventional loan limit with DTI ratio for future properties. I got two of the loans within a 4 month time frame - it was time consuming to submit all that documentation: W2s, tax returns, leases, insurance policies for all rentals, etc but I had quick closes for both, 30 days and 2 weeks. They did count part of my rental income for a property where the lease was 2 months old at the time of the loan application.
The 20% down is going to start stinging financially if I'm trying to scale - I haven't used a Private Lender or HML yet. I used a mortgage broker who shopped for the best rates and origination fees. On one of the threads it mentioned possibly being able to do 15% down on a DSCR loan. Are there specific requirements for that?
Btw, want to clarify since you mentioned DSCR vs. Conventional for your "personal property," that DSCR loans are exclusively for investment properties and cannot be lent on any properties that are going to be owner-occupied.