DCSR Loan and forms of Financing
Rental Property Investor · Orlando, FL · Member since 2015 · 131 posts · 62 votes
DCSR Loan and forms of Financing
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Nick BelskyBusiness Member
Residential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votesOne of the things I love about BP forums is that posters can get a variety of experiences from lenders, investors, etc... One thing to always keep in mind, is that we all have different experiences with different service providers. Even from the lending side, it would be a rare instance where two lenders/brokers are using the exact same lenders for their clients. There are many features and loan structures out there and once you get outside of conventional and agency backed loans, the rules are up to the backing investors and they can vary quite a bit. To say a feature or structure doesn't exist or is ONLY this way or that is a fallacy. There seems to be at least one scenario out there where those features or structure do in fact exist. The best way to find out is call the lender/broker and find out how. Your scenario may fit, it may not. Either way, you don't know unless you speak with someone about the specifics of your scenario.
As several have pointed out in this thread, terminology can change from person to person just like each person's respective experience. I speak with several well seasoned investors every week who don't believe me when I tell them that you can get 30 year fixed rate loans with no strings attached on investment and commercial properties. They've never heard of them. It happens all the time. It's not to say they are wrong, they simply haven't been exposed to a lender/broker who offers them yet. I am a teacher, a licensed Loan Officer, and a broker. We never stop learning. More importantly, each state has different definition of what is what. Some will lay out specifically what is considered commercial and what is residential, others are more vague. Each state may differ in the RE contracts and headings and such as well. I do not presume to know the ins and outs of each state's definitions off the top of my head.
Not necessarily. If you were to refinance the existing home out of your FHA and into conventional, you could purchase another FHA property. Fannie is clear on this, but sometime Underwriters get twitchy and won't approve loan. From my experience, provided you refi out of your current FHA loan, you should be fine to use FHA again then move into that property as you did before. With conventional, the guides are slightly different. You could absolutely buy another property with Conventional without moving into it. It would be designated at Non-Owner Occupied (NOO) and be priced as an investment property.
Fannie/Freddie will limit you to 10 loans, not including your primary residence. Many investors with purchase or refi into the DSCR loans to "free up slots" with Fannie/Freddie loans so they can continue to get the benefit of low down payment properties when house hacking. As others have pointed out above, many DSCR lenders DO NOT report to your personal credit bureaus. However, several Non-QM lenders I've worked with DO report to your personal credit even if you are closing a DSCR loan under an entity. Be sure to inquire with the lender/broker you are working with if this is important to you.
All depends on the property, the lender, and the guarantor's credit profile. In general, you are still looking at 20-25% down on 5+ unit at prime conditions. I've got a few who won't go over 70LTV though and 75LTV requires an exception with strong compensating factors. The Commercial world is a bit different from the 1-4 unit world. I closed on an 8-unit cash out refi last month at 80LTV and know of very few lenders who will do 80LTV on cash outs even for 1-4 units... but the loan does exist.
Cheers!
Belsky Mortgage, LLC527 Reviews
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- 4yJay HurstBusiness MemberLender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
In terms of interest rates there is actually a sweet spot right now with conventional rates on the rise and most of my DSCR investors have not yet moved up their rates. While a month ago with non-owner conventional rates in the low 3's DCSR loans were at least full point higher. But, with the large move in conventional rates and DSCR rates not yet moving it is almost a dead heat in rates. Same reason jumbo financing is actually quite a bit cheaper right now then conventional rates. Of course that rate distortion will not last for ever but not a bad time to take advantage.
Hurst Real Estate, INC4.989 Reviews - Rental Property Investor · Orlando, FL · Member since 2015 · 131 posts · 62 votes4y
Thanks @Jay Hurst that makes sense. As a lender, do you have some thoughts on the cons for a DSCR compared to traditional loan? For context, I'm trying to figure out if it's worth it to do a DSCR cash-out refi with the higher rate versus quit claiming the properties back into my name to do a refi. Weird stipulations that I've got with this lender that allows me to place the leveraged property into my LLC, but I can't refinance unless it's in my name.
- 4yJay HurstBusiness MemberLender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
If the property is in Florida you are going to have to pay a transfer tax for taking the property out of the LLC. just fyi. And it would much better to do that at closing then using a quit claim deed. As for what you are calling traditional financing do you mean a full Fannie/Freddie conventional loan?
Hurst Real Estate, INC4.989 Reviews - Member since 2018 · 29 posts · 12 votes4y
If you are still considering Greenville area, don’t overlook Spartanburg. There are lots of good things happening there and it’s right next door to Greenville. Quality of life if very good and the city is aggressively working on affordable housing to lift everyone up. You can still find bargains if you are willing to put in the work. Lots of neighborhoods in transition right now and I’m not talking about gentrification. I’m talking about good, safe houses for all. And there’s plenty of high end opportunities as well.
- Real Estate Agent · Greenville, SC · Member since 2021 · 210 posts · 142 votes4y
Originally posted by @Leigh S.:
If you are still considering Greenville area, don’t overlook Spartanburg. There are lots of good things happening there and it’s right next door to Greenville. Quality of life if very good and the city is aggressively working on affordable housing to lift everyone up. You can still find bargains if you are willing to put in the work. Lots of neighborhoods in transition right now and I’m not talking about gentrification. I’m talking about good, safe houses for all. And there’s plenty of high end opportunities as well.
I've done several deals in Spartanburg. Actually set to close one next week.
- 4yNick BelskyBusiness MemberResidential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votes
The only major differences in functionality of agency versus DSCR is the Pre-Payment Penalties and ways to qualify. The loans function just like each other... no balloon payments, fully amortized, fixed rates... closing costs are even similar. The only real cost difference is the down payment. Conventional is a 25% down minimum per Fannie/Freddie. Sometimes you can find a lender who is running promos and may do less, but they are rare. DSCR is a 20% down standard. Some lenders may ask for more based on credit or if 2+ units... but many don't. FHA gives real advantage in terms of down payment if you are looking to occupy. Otherwise, the PMI is a unnecessary expense that you may have to calculate in for 12 months before you can refi out of the FHA loan.
DSCR loans have become a standard in the commercial space and for many 2-4 residential lenders as well. They just make more sense and are a crap load easier to qualify for and get done without all the headaches of having a scope up you for a full history like conventional.
What's keeping you from getting 5+ doors?
Cheers!
Belsky Mortgage, LLC527 Reviews - 4yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Originally posted by @Josh Calcanis:
Hey BP - I'm finally on the hunt for some new properties for 2022. I've been pumping up the other portions of my portfolio and putting a lot of my time into our startup (which we'll hopefully see an M&A this year), so I'm taking my time getting acquainted with some other forms of financing. I've done the traditional loan route, the cash-out refi and use that capital for another property, and then the FHA route (BRRR).
Through my research and talking with two lenders (one I've used the other is a referral) I've come across a DCSR loan. It reads as a commercial loan, but I still can't get something over 4 doors. It also seems to have some early payoff penalties and higher rates than a traditional investment property loan. The one benefit I've got and why I'm looking at it is the fact that I could get the loan without having to Quit Claim the properties again (all units are in my LLC).
Does anyone have some general advice or experience with a DCSR loan? Would you use this as your last resort? Is there anything I'm missing?If you can qualify for conventional financing and want to keep your property long term,it's definitely worth it to take the lower rates/fees; even if it's just a little bit. Over time, it will be cheaper.
On the other hand, DSCR lending is the growth sector of the mortgage market for a number of reasons; the number of people who won't qualify for conventional financing because of student loan debt (and other debt, but student loan debt is huge right now), the number of financed properties, lower ltv's for conventional, the gig economy where a borrower can use deposits to qualify for income vs. a W2 and so many others.
DSCR lowers the barrier to entry for into investing in real estate where Fannie and Freddie are still trying to figure it out and with comparable rates or rates as low as they are naturally, DSCR is experiencing an explosion of growth.
All the best
Stephanie
- Rental Property Investor · Orlando, FL · Member since 2015 · 131 posts · 62 votes4y
Thanks @Jay Hurst - the doc stamps are why I'm looking into the DSCR. They're already in my LLC and to do the fannie/freddie conventional they need to be out (which you just mentioned).
@Nick Belsky thanks for the detailed breakdown! When it comes to pre-payment penalty that would only be considered paying off the loan instead of doing a refinance right? Technically the loan is paid off in a refinance. Good to know on the 20% and as someone mentioned earlier seems like the rates are about the same?
From my understanding DSCR is only for up to 4 doors? Anything over is commercial and a different type of loan or am I misunderstanding that?
Thanks @stephanie p.! - 4yJoshua JanusBusiness MemberRealtor · Cleveland, OH · Member since 2021 · 1k+ posts · 1k+ votes
I am working to use a DSCR loan right now to get an 8-10 unit @Josh Calcanis
- 4yNick BelskyBusiness MemberResidential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votes
@Josh Calcanis
I've done DSCR on up to 32-units. The cap depends on the lender but several I work with will go 50+ and one goes up to 128 units.
Non-QM lenders tend to do residential only, or 1-4 units. Commercial are going to do 5+, generally speaking.
Cheers!
Belsky Mortgage, LLC527 Reviews - Rental Property Investor · Orlando, FL · Member since 2015 · 131 posts · 62 votes4y
@Joshua Janus nice! Are the capital requirements or reserves the same as a conventional? ~6 months mortgage? Or does that go out the window if you've got the income to cover it?
@Nick Belsky So what I'm reading is that the way to do a DSCR loan for something larger than a 4 unit would be with a commercial lender? If the income covers the mortgage is that all it takes for the DSCR? - 4yNick BelskyBusiness MemberResidential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votes
@Josh Calcanis
Property income and guarantor creditworthiness, yes.
Each lender has various PPP triggers but refinancing or selling are the two most common. Some are step downs such as 3-2-1 and others more firm like 5-5-5. The percentage is typically based on the original loan amount and the PPP can be anywhere from 1-7 years
Cheers!.
Belsky Mortgage, LLC527 Reviews - Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes4y
Be careful about transfering Title to yourself just to get a conforming residential loan. I keep writing about this. Look at this thread for reference: https://www.biggerpockets.com/... Nobody has said otherwise, but in my layman's point of view you are screwing up your chain of Title and more importantly not properly maintaining your LLC's corporate veil. Remember, loan officers and cpa/accountants don't have a fiduciary duty to help you protect your corporate veil, this is a legal matter.
Since you are you using a LLC, the "legally correct" way to finance is to use commercial financing. The quirk you mentioned is that legal entities are NOT eligible for conforming residential loans. This is part of the cost to having the limited liability of a LLC.
A DSCR loan is a not a conforming residential product (to the best of my understanding). People, in general, gloss over the types of loan products and whether they are conforming. Maybe because I'm used to conforming loans, but you don't have the consumer protections with non-conforming loans. Nothing against them, but you need to be much more diligent which it appears you are going that route. So, you probably are already working with a commercial lender since you are working up a DSCR loan product.
Hope this helps. Good luck.
- Rental Property Investor · Orlando, FL · Member since 2015 · 131 posts · 62 votes4y
Thanks @Nick Belsky
@David M. that's good to know and very useful information. So it's in my best interest to stick with the plan of leaving the properties in the LLC - I'll read through that thread as well! - 4yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Originally posted by @Joshua Janus:
I am working to use a DSCR loan right now to get an 8-10 unit @Josh Calcanis
@Josh Calcanis
DSCR can go for a max of 10 units depending on the lender. The rates are generally a point higher for 5+ units.
- 4yAnthony KingPro MemberInvestor · Charlotte, NC · Member since 2020 · 236 posts · 247 votes
@Josh Calcanis I've only used conventional Fannie/Freddie loans on my small multifamilies, but I'm almost maxed out with those. Forgive my ignorance, but how do you distinguish a DSCR lender from a commercial lender? What tells you a lender is DSCR?
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes4y
I think you kinda have to ask.. Also, does it really matter? Lets face it, a residential lender will still originate a nonconforming loan, e.g. jumbo loans (because they are over the Fannie Mae limits), non-QM loans, etc. To me, it kinda depends if you've found a good loan officer and which way are you leaning towards because of the overlap.
Or, for example, hard money lenders will still want to sell you another loan at the end, a conventional 30yr...
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes4y
Yes, if you are already using a LLC, then just use the LLC. That means getting nonconforming loans taken out in the name of the LLC. Treat it as its own entity, and maintain your corporate veil.
- 4yNick BelskyBusiness MemberResidential and Commercial Broker · Member since 2021 · 1k+ posts · 704 votes
All DSCR loans are NOT commercial loans. Commercial loans are typically best categorized as anything over 5+ units, generally speaking. Anything 1-4 Units is NOT commercial. DSCR is the vehicle to qualify for a loan, it is NOT restricted to any units unless by the lender. I've done DSCR loans on up to 32 Unit properties and on as little as a SFR. The main qualifier is that it must be NON-Owner Occupied (NOO).
A CPA can best advise on how structure your purchases, whether in an entity or as an individual. In terms of DSCR loans or even other portfolio loans, you don't necessarily have to close under an entity. I work with a few lenders who will close and vest either way. It all depends on what your goals are, both short term and long term.
Cheers!
Belsky Mortgage, LLC527 Reviews - Dallas Tx · Member since 2021 · 112 posts · 31 votes4y
@Nick Belsky so wait if I buy my first property here in the next 10 months trough a traditional conventional 3% or fha 3.5%
And decide to lease out my property after 1 year (meeting the fha loan condition of a first time home buyer ) in order for me to buy my second home I need this type of loan? And a minimum 20% down payment ?
Thanks in advance
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes4y
I am going to guess that maybe you think that after you move out in 1yr that you have to change loans? The answer is no. Just keep the convetional or FHA loan in place. After living there 1 yr you will have satisfied the requirement for owner occupation.
Now, after the 1yr you say you decide to move out of your 1st property and lease it out. I assume you are going to buy another place to live. If correct, then you can generally use another conforming loan, like a convetional or perhaps FHA to get your next property. As part of the qualification for the loan, the lender will include your profit/loss of your rental recalc'ed using 75% of your rent schedule (NOT your profit, but your rent).
the fannie mae guidelines allow for the use of expected rent as part of your qualifications. In my experience, either the loan officer is ignorant or the lending company's policy is more stringent than the Fannie Mae requirements. In either case, move onto another lender/loan officer.
I think its mostly clear. If you want the cheapest loan, use a conforming product assuming you will be occupying the property for at least a year. If you can't qualify for a conforming loan product, then you have to move on to other loan products and 'pay for them.'
- Lender · Kansas City, MO · Member since 2022 · 25 posts · 13 votes4y
DSCR loans are generally a commercial loan. In my experience they are a 5 yr. fixed, 25 yr. amortizing loan. I hear a lot of borrowers stating that they plan to purchase and then Quit Claim Deed to their LLC. As mentioned, not only does this mess with the chain of title and potentially expose you personally liable, but by Quit Claiming it to your LLC, you are defaulting on your loan agreement. If the loan was given to you as an individual, you cannot just change it to your LLC. Banks will audit county records to ensure that a borrower hasn't defaulted on their loan agreement and it can cause big problems down the road. DSCR loans don't usually have a door min/max but the property must cashflow at closing. A couple of helpful items for a DSCR loan:
DSCR minimum is generally 1.25X (this means that for every dollar in debt expense you must have $.25 left over in net income.)
Potential rents are not considered. The property must cashflow via rents and you will need to have a lease agreement in place or an intent to lease. (If the lease agreement is month to month, some lenders will require that your tenant sign a new lease)
If a multi-unit property, it must be at least 70-80% occupied
If historical financials are not provided by the seller (i.e. maintenance, capex, ins. and property management fees) Most lenders have their own pro-forma standards which are generally MUCH higher than actual expenses.
Ask your lender for all the above information requirements. If they won't provide their underwriting metrics, walk away.
- Rental Property Investor · Orlando, FL · Member since 2015 · 131 posts · 62 votes4y
@Anthony King - David M hit it. My lender I've used for a refinance before wrote up a DSCR and estimated PITI for me but he was clear that it wasn't going over the 4 unit minimum, but based on what @Nick Belsky has talked through it is up to the lender.
Nick thanks for the explanation of the vehicle to qualify for the loan. Appreciate the note on the CPA as well! - Lender · PA · Member since 2019 · 533 posts · 461 votes4y
Many D.S.C. lenders do not work in greater than 1-4 units. Some lenders will lend on multi families. They will restrict the LTV to below 80 percent. I do not know if that helps you.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes4y
I was rereading some of this post, including yours regarding distinguishing a DSCR lender from a commercial lender.
I think part of the confusion is terminology (of course). "Commercial" as it applies to lending to me is a "catch-all" phrase. Its basically NOT a 'conforming' residential loan. A "conforming" loan (which pretty much by definition is owner-occupied residential) is a loan that 'conforms' to the Fannie Mae / Freddie Mac (i.e. the gov't) requirements/guidelines. If a lender originates a loan according to these rules, they can resell the Note to the the various quasi-govt agencies to maintain their liquidity. This is one way the US Gov't supports homeownership.
If you've been around for bit, you might recall a "jumbo" loan product. This is just a loan that is nonconforming because the amount exceeds the limits imposed by the Gov't. Its not really a "commercial" product as I believe most "residential" lenders will originate it if somebody is buying an expensive property. Its "non conforming."
Once you are getting a "non conforming" loan, then there isn't a 'rulebook' set by Big Brother. The lenders/the markets set their own. Of course, there is some similarity to the rules for retail practicality and business practicality (I'm pretty sure some of these are still resold as their is still a secondary market for these notes).
Does that help?
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