DSCR Loans: Is it true they DON'T allow you to make ANY renovations?

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DSCR Loans: Is it true they DON'T allow you to make ANY renovations?

Dan N.
Member since 2019 · 119 posts · 60 votes

Just got off the phone with a lender that was interviewed recently on Dave Meyers' podcast.

Had some of the best terms I have come across so far for DSCR loans.

BUT

They DO NOT allow you to do ANY renovations (maximum paint) to the property, even if you finance the renovations with your own funds (as opposed to adding it to the loan).

Is this normal?

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Mark MunsonBusiness Member
Lender · Orlando, FL · Member since 2022 · 440 posts · 300 votes
3y

Hi @Dan N.

DSCR loans don't lend you rehab money whatsoever and the properties have to be in rent ready condition. To be specific, most guidelines call for the property to be in C4 condition with no issues with the 4 major components: roof, HVAC, electrical, and plumbing.

I have done 100s of DSCR loans on the lending side and as far as a lender preventing you from doing rehab after you have closed, I've never heard of that. How would they even know? They are selling the note to Wall-Street within 30 days and they aren't policing the houses. If you tell them you are intending to knock down walls or do major rehab, then of course they would probably just steer clear of financing the deal. If you need any advice, feel free to reach out.

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  • Mark MunsonBusiness Member
    Lender · Orlando, FL · Member since 2022 · 440 posts · 300 votes
    3y

    Hi @Dan N.

    DSCR loans don't lend you rehab money whatsoever and the properties have to be in rent ready condition. To be specific, most guidelines call for the property to be in C4 condition with no issues with the 4 major components: roof, HVAC, electrical, and plumbing.

    I have done 100s of DSCR loans on the lending side and as far as a lender preventing you from doing rehab after you have closed, I've never heard of that. How would they even know? They are selling the note to Wall-Street within 30 days and they aren't policing the houses. If you tell them you are intending to knock down walls or do major rehab, then of course they would probably just steer clear of financing the deal. If you need any advice, feel free to reach out.

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  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    3y
    Quote from @Dan N.:

    Just got off the phone with a lender that was interviewed recently on Dave Meyers' podcast.

    Had some of the best terms I have come across so far for DSCR loans.

    BUT

    They DO NOT allow you to do ANY renovations (maximum paint) to the property, even if you finance the renovations with your own funds (as opposed to adding it to the loan).

    Is this normal?


    Not entirely accurate. DSCR Loans are almost exclusively going to be 30-year loans so obviously it wouldn't make sense to restrict against any renovations for a property over a 30 year period!

    The vast majority of the requirements occur pre-close in the underwriting stage - the requirement is to not need renovations "at origination" - this is determined in the appraisal and generally can't exceed anything more than $2,000 in needed maintenance.  After that, as long as you don't occupy the property, there should be no issues in renovating or adding to the property with your own funds

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  • Dan N.
    OP
    Member since 2019 · 119 posts · 60 votes
    3y
    Quote from @Mark Munson:

    Hi @Dan N.

    DSCR loans don't lend you rehab money whatsoever and the properties have to be in rent ready condition. To be specific, most guidelines call for the property to be in C4 condition with no issues with the 4 major components: roof, HVAC, electrical, and plumbing.

    I have done 100s of DSCR loans on the lending side and as far as a lender preventing you from doing rehab after you have closed, I've never heard of that. How would they even know? They are selling the note to Wall-Street within 30 days and they aren't policing the houses. If you tell them you are intending to knock down walls or do major rehab, then of course they would probably just steer clear of financing the deal. If you need any advice, feel free to reach out.


     Hi Mark

    Regarding rehab costs- yes, I am aware of that and that is why I mentioned that I told them tha the rehab costs will be out of my pocket and that I am not looking for them to cover those costs.
    I will DM you since you have a lot of experience with DSCRs

    0Reply
  • Dan N.
    OP
    Member since 2019 · 119 posts · 60 votes
    3y
    Quote from @Robin Simon:
    Quote from @Dan N.:

    Just got off the phone with a lender that was interviewed recently on Dave Meyers' podcast.

    Had some of the best terms I have come across so far for DSCR loans.

    BUT

    They DO NOT allow you to do ANY renovations (maximum paint) to the property, even if you finance the renovations with your own funds (as opposed to adding it to the loan).

    Is this normal?


    Not entirely accurate. DSCR Loans are almost exclusively going to be 30-year loans so obviously it wouldn't make sense to restrict against any renovations for a property over a 30 year period!

    The vast majority of the requirements occur pre-close in the underwriting stage - the requirement is to not need renovations "at origination" - this is determined in the appraisal and generally can't exceed anything more than $2,000 in needed maintenance.  After that, as long as you don't occupy the property, there should be no issues in renovating or adding to the property with your own funds

    Hi Robin,

    Interesting point of view. Verbally they said over the phone that ANY rehab or renovation needs to be reported and would NOT be allowed since the property is collateral for this loan (which doesn't sound different to me than any other loan).
    0Reply
  • Dan N.
    OP
    Member since 2019 · 119 posts · 60 votes
    3y
    Quote from @Mark Munson:

    Hi @Dan N.

    DSCR loans don't lend you rehab money whatsoever and the properties have to be in rent ready condition. To be specific, most guidelines call for the property to be in C4 condition with no issues with the 4 major components: roof, HVAC, electrical, and plumbing.

    I have done 100s of DSCR loans on the lending side and as far as a lender preventing you from doing rehab after you have closed, I've never heard of that. How would they even know? They are selling the note to Wall-Street within 30 days and they aren't policing the houses. If you tell them you are intending to knock down walls or do major rehab, then of course they would probably just steer clear of financing the deal. If you need any advice, feel free to reach out.

    Hi @Mark, just DM'd you.

    0Reply
  • Alex BekezaBusiness Member
    Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    3y

    @Dan N. Are you talking about RCN?

    DSCR loans, in general, are designed for rent ready properties. That being said, if the appraiser does not make any notes about the value being "subject to repairs" then you should have no problem qualifying for a DSCR loan.

    I can guarantee the lender would not want their loan officer telling you that you can't improve the property post close. My best guess is that it was a newer LO who lumps anything that needs any touch ups whatsoever into the hard money realm. (not necessarily true if the properties already in decent shape and you're just doing some light work by choice). 

    If you're doing more significant repairs that drive a lot of value then you may want to consider hard money first, make improvements, and then refi INTO a DSCR loan (as early as 90 days with us, almost everyone else wants 6-12 months). The reason I say this is because any competitively priced DSCR loan (that still means in the 7s today) would have a prepayment penalty (not ideal for a BRRRR purchase but great for the refi take out).

    I hope this was helpful. 

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  • Dan N.
    OP
    Member since 2019 · 119 posts · 60 votes
    3y
    Quote from @Alex Bekeza:

    @Dan N. Are you talking about RCN?

    DSCR loans, in general, are designed for rent ready properties. That being said, if the appraiser does not make any notes about the value being "subject to repairs" then you should have no problem qualifying for a DSCR loan.

    I can guarantee the lender would not want their loan officer telling you that you can't improve the property post close. My best guess is that it was a newer LO who lumps anything that needs any touch ups whatsoever into the hard money realm. (not necessarily true if the properties already in decent shape and you're just doing some light work by choice). 

    If you're doing more significant repairs that drive a lot of value then you may want to consider hard money first, make improvements, and then refi INTO a DSCR loan (as early as 90 days with us, almost everyone else wants 6-12 months). The reason I say this is because any competitively priced DSCR loan (that still means in the 7s today) would have a prepayment penalty (not ideal for a BRRRR purchase but great for the refi take out).

    I hope this was helpful. 



    @Alex Bekeza damn you know your lenders. Right on with RCN, it was them lol.
    Very helpful info. Thanks

    1Reply
  • Nick BelskyBusiness Member
    Lender · Orlando, FL · Member since 2021 · 1k+ posts · 704 votes
    3y

    @Dan N.

    Yeah, no.  Not normal at all.  Doesn't even make sense.  Call a different lender or use a broker.

    Cheers!

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  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    If the property in its current condition qualifies for DSCR, you will get lent only on the purchase price. Not for renovations. You can do renovations on your own.

    0Reply
  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    3y

    You can do the renovations on your own. I would recommend working with a broker instead. Lots of lenders have different guidelines. A good broker will present your scenario to get you to the finish line. 

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  • Ethan Gidcumb
    Lender · San Diego, CA · Member since 2022 · 130 posts · 75 votes
    3y

    Hey Dan! I will add to what Mark Munson mentioned. I could see a lender being concerned about any major renovations affecting the monthly income on the loan, (since it's based off that). But, if you have a 30 year loan, you eventually would need to do some bigger renovations.

    1Reply
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