Financing options & DSCR Underwriting

Cape Cod, Massachusetts
General Real Estate Investing
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Financing options & DSCR Underwriting

Brian Ellis
Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes

Do they allow market/future rents to calculate? Or do they use current rents?

What ive been able to gather is that they will allow future rents if the place is vacant, and current rents if they are occupied.

Finally found an off-market deal and running into financing issues. I either need to bring the loan down by a bigger down payment which I dont have, or ask for seller financing. But I believe the bank may have an issue with seller carrying a second note in the form of a down payment?

Any help or suggestions would be appreciated.

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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
3y
Quote from @Brian Ellis:

Do they allow market/future rents to calculate? Or do they use current rents?

What ive been able to gather is that they will allow future rents if the place is vacant, and current rents if they are occupied.

Finally found an off-market deal and running into financing issues. I either need to bring the loan down by a bigger down payment which I dont have, or ask for seller financing. But I believe the bank may have an issue with seller carrying a second note in the form of a down payment?

Any help or suggestions would be appreciated.

If its an acquisition loan (which this sounds like) - then most DSCR lenders will underwrite the market rent as determined by the appraisal (1007 form). Some DSCR lenders that are particularly specialized in Short Term Rentals can use projections from places such as AirDNA as @Scott E. mentioned, but property will have to be fully indicated as use for STR. DSCR lenders will also pretty much universally not allow a second note

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  • Scott E.
    Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
    3y

    Call a couple of loan officers who do DSCR loans. I've been shopping a DSCR loan on one of my flip deals and I was surprised to learn that their guidelines vary quite a bit.

    Some will do a loan where the projected rent is LESS THAN the mortgage payment (which seems crazy to me)

    I found another who will lend based on AirDNA projected gross revenue for a short term rental (which also seems crazy to me)

    You're probably right on your last point. I don't know any lender who will allow you to do 100% CLTV financing with the seller carrying the 2nd note.

    2Reply
  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    3y
    Quote from @Brian Ellis:

    Do they allow market/future rents to calculate? Or do they use current rents?

    What ive been able to gather is that they will allow future rents if the place is vacant, and current rents if they are occupied.

    Finally found an off-market deal and running into financing issues. I either need to bring the loan down by a bigger down payment which I dont have, or ask for seller financing. But I believe the bank may have an issue with seller carrying a second note in the form of a down payment?

    Any help or suggestions would be appreciated.

    You have a couple of options, but you definitely need a broker that can deliver on each of them.  They don't all go for the same lender, so the rates and fees will vary.
    If you need a lender that will allow a seller 2nd, that money is out there up to 90% combined loan to value.  The lender will allow the seller to hold the difference between 75% (their max loan to value) and 90% (the max allowed cltv or combined loan to value).
    If you need a lender that will lend on projected gross revenue based on Air DnA information (purchase only), that money is out there as well, but that lender won't allow a 2nd mortgage to be held by the seller.
    Stephanie
    1Reply
  • Sarah HattonPro Member
    Lender · San Diego · Member since 2021 · 80 posts · 56 votes
    3y

    Hey Brian, 

    Each institution will have different ways of calculating rent.Here are just a few of the iterations i've seen: 

    - 90% of in place or appraised rents

    - Lesser of the in place rents or market rents

    - 100% of appraisal rent

    - 100% of AirDNA

    - 125% of appraisal rent IF in place rents support a higher value. 

    2Reply
  • Hailey Giddings
    Boise, ID · Member since 2023 · 11 posts · 0 votes
    3y

    Hi Brian, I sent you a connection request/message. May have an option for you.

    0Reply
  • Timothy Hero
    Lender · United States · Member since 2020 · 1k+ posts · 499 votes
    3y

    I broker with a list of DSCR lenders. I've closed over 160 mortgages in two years, so I can chime in with some input:

    There's 3 types of lenders right now for the rent scenario:

    1.) The ones who don't lend on vacant at all

    2.) The ones who lend on vacant properties, but reduce LTV by 5%

    3.) The ones who do lend on vacant and will go off market rent

    Keep in mind, DSCR lenders ALWAYS go off the lower of the two between market rent and actual rent. I've had many files where the investor is getting x amount on rent and market rent comes in x amount cheaper and lenders always go with the lower of the amount. Keep this in mind.

    2Reply
  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    3y
    Quote from @Brian Ellis:

    Do they allow market/future rents to calculate? Or do they use current rents?

    What ive been able to gather is that they will allow future rents if the place is vacant, and current rents if they are occupied.

    Finally found an off-market deal and running into financing issues. I either need to bring the loan down by a bigger down payment which I dont have, or ask for seller financing. But I believe the bank may have an issue with seller carrying a second note in the form of a down payment?

    Any help or suggestions would be appreciated.

    If its an acquisition loan (which this sounds like) - then most DSCR lenders will underwrite the market rent as determined by the appraisal (1007 form). Some DSCR lenders that are particularly specialized in Short Term Rentals can use projections from places such as AirDNA as @Scott E. mentioned, but property will have to be fully indicated as use for STR. DSCR lenders will also pretty much universally not allow a second note

    [email protected]
    Harpoon Capital514 Reviews
    WebsiteView Page
    3Reply
  • Daylen Fiallo
    Specialist · Miami, FL · Member since 2018 · 72 posts · 24 votes
    3y

    Hi Brian,

    DSCR lenders will be more conservative and usually have a 1.25x DSCR rule.

    0Reply
  • Brian Ellis
    OP
    Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes
    3y
    Quote from @Robin Simon:
    Quote from @Brian Ellis:

    Do they allow market/future rents to calculate? Or do they use current rents?

    What ive been able to gather is that they will allow future rents if the place is vacant, and current rents if they are occupied.

    Finally found an off-market deal and running into financing issues. I either need to bring the loan down by a bigger down payment which I dont have, or ask for seller financing. But I believe the bank may have an issue with seller carrying a second note in the form of a down payment?

    Any help or suggestions would be appreciated.

    If it's an acquisition loan (which this sounds like) - then most DSCR lenders will underwrite the market rent as determined by the appraisal (1007 form). Some DSCR lenders that are particularly specialized in Short Term Rentals can use projections from places such as AirDNA as @Scott E. mentioned, but property will have to be fully indicated as use for STR. DSCR lenders will also pretty much universally not allow a second note

    This was the advice I had received from my lender. They will use market rent.
    0Reply
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