DSCR Loan for a first time home owner
Rental Property Investor · Charlotte · Member since 2022 · 2 posts · 0 votes
DSCR Loan for a first time home owner
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Lender · Member since 2021 · 100 posts · 164 votes
4yCongrats on graduating! And cheers to wanting to jump into homeownership. But, before you take a deep dive ... let's unpack a few things.
(1) DSCR loans do not factor in income / employment - true. But, they are for creditworthy borrowers. So, think a middle score of 700+ and at least 3 total total and / or active trade-lines. Student loans, auto loans, credit cards are all your friends here.
(2) DSCR loans are for non-owner occupied properties. Hard stop here. If an underwriter gets a whiff of owner occupancy (aka, they think the borrower may in fact be buying this property to live in it) the deal is most likely dead. What would imply such? A borrower who does not currently own a home (claims to rent or live with their parents) or if the area in which the deal takes place isn't a typical rental market. This isn't to suggest you cannot buy a rental property with a DSCR loan when living at home or renting, it's just worth mentioning.
(3) Re: occupancy for 6-12mo and then an uptick on the interest rate? That seems like folklore. What this person may have been trying to imply is if you get a loan via a DSCR lender, and you live in it (effectively putting yourself in default) they may actually trigger the acceleration clause and you'd then have the default rate that was agreed to in the loan docs .... I almost have no comment here. It's called equity stripping. Is it possible, yes. But, DSCR loans are for non-owner occupied (see #2) so no such situation should ever come into play if you are responsible.
9 Replies
- Lender · Tampa/St. Petersburg/Sarasota FL and Knoxville/Sevierville/Maryville, TN · Member since 2018 · 361 posts · 178 votes4y
DSCR loans are used for rental properties. They are designed to make sure that the rental income covers the cost of the property and debt (principal and interest).
Why are you trying to refinance the conventional loan? I am a little confused about what your goals are.
Most DSCR loans don't care about what your work history is as long as you have some experience in real estate.
- 4yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Are you looking to occupy the home? If so, then the DSCR loan won't work for you (DSCR is nor non-owner occupied only, strictly)
Harpoon Capital515 Reviews - 4yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
Quote from @Anthony Jones:
Hello everyone,
Currently as a recent graduate I do not have the W2 history to use conventional loans so my main focus has been DSCR loans.
I have the bank statements and reserves part of the loan process secured. My question relates to how realistic this loan would be for me. I've heard that for a first time home owner, the lender may: wait until you've occupied the home for 6-12 months before giving you the loan, increase the interest rate dramatically which may render this loan useless entirely if it means I wont cash flow on my property, and also increase my down payment therefore decreasing my LTV, which would also render this loan useless for me if I cant refinance to pay off my original lender.
First, I guess I'm wonder if the above statements are accurate and if so, what that means in terms of if I should pursue a DSCR loan?
If these things did happen to work out, could I take out a DSCR for the purchase, then another DSCR for the refinance and use it to pay off the original purchase DSCR?
Thank you in advance!Anthony
Anthony
Congratulations on graduation.
Focus on getting either a business started or a W2 track record so you are eligible for conventional or FHA financing. FHA would be the best place to start in my opinion. You should find a multi family (2-4 units, 4 preferably) and live in one while the other units pay the mortgage. There are some nuances to it, but house hacking is by far the best and most popular way to start your real estate journey. Once you're established, then start looking at other means of financing your properties. Conventional financing should be your first way because the money is cheaper than any other, but look at seller financing as a viable option as well. DSCR, while a wonderful niche, isn't for first time homebuyers and should only be used once conventional financing has been exhausted (and I'm a DSCR broker).
All the best
Stephanie
- Investor · Central Virginia · Member since 2020 · 394 posts · 253 votes4y
Hi @Anthony Jones, I know a lender in Tucson who qualified me without W2 for my primary home. I am not sure if they are licensed in NC, They did my home loan in Texas and Virginia. It is possible to get a 5% conventional loan without a W2, as long as you are going to be employed. Dm me and I will give you his name and email address.
Chris
- Lender · Member since 2021 · 100 posts · 164 votes4y
Congrats on graduating! And cheers to wanting to jump into homeownership. But, before you take a deep dive ... let's unpack a few things.
(1) DSCR loans do not factor in income / employment - true. But, they are for creditworthy borrowers. So, think a middle score of 700+ and at least 3 total total and / or active trade-lines. Student loans, auto loans, credit cards are all your friends here.
(2) DSCR loans are for non-owner occupied properties. Hard stop here. If an underwriter gets a whiff of owner occupancy (aka, they think the borrower may in fact be buying this property to live in it) the deal is most likely dead. What would imply such? A borrower who does not currently own a home (claims to rent or live with their parents) or if the area in which the deal takes place isn't a typical rental market. This isn't to suggest you cannot buy a rental property with a DSCR loan when living at home or renting, it's just worth mentioning.
(3) Re: occupancy for 6-12mo and then an uptick on the interest rate? That seems like folklore. What this person may have been trying to imply is if you get a loan via a DSCR lender, and you live in it (effectively putting yourself in default) they may actually trigger the acceleration clause and you'd then have the default rate that was agreed to in the loan docs .... I almost have no comment here. It's called equity stripping. Is it possible, yes. But, DSCR loans are for non-owner occupied (see #2) so no such situation should ever come into play if you are responsible.
- Rental Property Investor · Greenville, NC · Member since 2014 · 19 posts · 4 votes4y
I believe Carolina Hard Money is in your area as well, if traditional financing does not work out.
- Rental Property Investor · Inlet Beach, FL · Member since 2018 · 199 posts · 111 votes4y
@Anthony Jones
Regarding qualifying for a conventional loan, your schooling counts in the "two year employment history." You will just need to provide transcripts, and probably have your cutrent employer complete a written verification of employment.
Go for a Home Ready (Fannie) or Home Possible (Freddie) loan with 3%-5% down. You will just complete and online course to get a better rate (personally I think Freddie is easier overall).
In 6 months start looking to refinance so you can drop the Mortgage Insurance Premium (simply refinance based on increased value to get you under 80% LTV). See if you can qualify using a Mortgae Tax Credit Certificate (MCC) - ask the lender about this. Student loans should be calculated as 1% of balance as the monthly payment.
Quick stuff, others mentioned as well for DSCR:
DSCR is debt service coverage ratio.
Sorry if you know this already:
It is calculated by taking the monthly income established by the appraisal form 1007 (and/or form 216). Those are in addition to the appraisal report (which is mostly used to determine property value, but also tons of other info.)
The DSCR ratio is a factor in qualifying at most lenders. Some will have a cut-off ratio and other will apply lock pricing adjustments or have other restrictions (overlays) based on lower DSCR ratios. You might get better rates or terms for higher DSCR ratios, but not usually (the benefit will ultimately be to you as the Landlord collecting rent).
For example, the investment property monthly expenses are $2,500. The projected rent on Form 1007 is $3,200 so you'd have $3,200/$2,500 = 1.28
Some lenders allow short term rental instead of l9ng term rental on the 1007, but will probably also require the current owner (seller) to provide the past 12 months rent rolls, or rental income.
Some will have loan-to-value (LTV) adjustments as well depending on certain things.
As a first time homebuyer (which would mean also first time investor), there will be additional restrictions like requiring more reserves or lower LTV or rate adjustment.
Typically, you can close DSCR loans in the name of and LLC/Corporation and hold title the same (this is not allowed on Fannie and Freddie or any government loan like FHA or VA).
You personal credit score will matter, but the DSCR really determines the viability of the loan, not your personal income.
I'd say you should expect to put at least 20% down, but probably really need 25% to 30%.
You may also need more down to improve the ratio as well.
- Lender · Los Angeles · Member since 2022 · 8 posts · 7 votes4y
Quote from @Anthony Jones:
Hello everyone,
Currently as a recent graduate I do not have the W2 history to use conventional loans so my main focus has been DSCR loans.
I have the bank statements and reserves part of the loan process secured. My question relates to how realistic this loan would be for me. I've heard that for a first time home owner, the lender may: wait until you've occupied the home for 6-12 months before giving you the loan, increase the interest rate dramatically which may render this loan useless entirely if it means I wont cash flow on my property, and also increase my down payment therefore decreasing my LTV, which would also render this loan useless for me if I cant refinance to pay off my original lender.
First, I guess I'm wonder if the above statements are accurate and if so, what that means in terms of if I should pursue a DSCR loan?
If these things did happen to work out, could I take out a DSCR for the purchase, then another DSCR for the refinance and use it to pay off the original purchase DSCR?
Thank you in advance!Anthony
There are no set rules with non-QM loans like these. The lenders I work with won't do a DSCR loan for a first time homebuyer. There is a program that does not require income docs for owner occupied properties. They are quite easy to qualify for, but they require 25% down. Please reach out if you'd like to explore further.
In addition to the above, as a Mech E I'd like to think you have a salary W2 job. That sort of job doesn't need the income to be "seasoned." You can get a loan right away. Have you even spoken with a lender?
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