DSCR loan low rental appraisal?

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DSCR loan low rental appraisal?

John Asher
Member since 2024 · 9 posts · 5 votes

I just got an appraisal back for a property I am trying to cash out refi.  I bought it for $100k and the appraisal came back at it being worth $210k but only worth $1000 a month in rent (the rental comps are nowhere near as nice as the house in my opinion and one of them is really a house converted to an office). My application says the home should rent for $1500 and is worth $195k. Personally I wouldn’t rent it for less. I imagine this will be an issue? 

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Katie Smith
Member since 2023 · 348 posts · 190 votes
2y

Hi John! Are you working with a broker or direct lender? This is when working with a broker comes in handy - as they can get creative with other lending channels. Some lenders will only use the monthly rental income on the 1007, and others will allow a variance if you have a current lease. I recently had a similar situation occur with one of my clients. They had a lease in place for $2,350, and the 1007 came in at $1,995. The channel we originally were going with only takes the 1007 number - we tried to dispute the appraisal with supporting comps and the fact that the appraiser completely missed a bathroom but they wouldn't increase the 1007 amount. We then moved the borrower to another channel that allows a variance AND an appraisal transfer, so they did not have to pay for another appraisal. I would try an explore another option.

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  • AJ WongBusiness Member
    Real Estate Broker · Oregon & California Coast · Member since 2022 · 834 posts · 696 votes
    2y

    Hi John, could definitely be an issue as for DSCR loans the appraisal income is typically the number used for qualifying. Whether the lender allows it will depend on the ratio required. Usually a 1 to 1 or 1.25 is standard..or the $1k needs to be sufficient to cover the PITI of the proposed loan. Check with your lender..You might also be able to do an appraisal 'review.' Or get a tenant in there at market rates?

    Worst case scenario check in with @Joseph Chiofalo he just helped a client with niche investor that has no ratio requirement and the unit can be vacant. The LTV might be limited but most DSCR can go up to 75-80% on a cash out with above average credit. This particular refi the appraisal was ordered Tuesday and received yesterday..also at expected value..and rents. Good luck!

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  • Devin PetersonBusiness Member
    Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 667 votes
    2y
    Quote from @John Asher:

    I just got an appraisal back for a property I am trying to cash out refi.  I bought it for $100k and the appraisal came back at it being worth $210k but only worth $1000 a month in rent (the rental comps are nowhere near as nice as the house in my opinion and one of them is really a house converted to an office). My application says the home should rent for $1500 and is worth $195k. Personally I wouldn’t rent it for less. I imagine this will be an issue? 

    A lender will always use the lesser of the two appraise rent schedule or leases. They do this because they side on the fence of conservatism.
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  • John Asher
    OP
    Member since 2024 · 9 posts · 5 votes
    2y

    Is this worth challenging or getting a second appraisal? Even with only $1000 in rent I’m still over a 1 to 1 ratio (was not taking out a lot of equity) but under a 1.25 ratio.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    2y
    Quote from @John Asher:

    Is this worth challenging or getting a second appraisal? Even with only $1000 in rent I’m still over a 1 to 1 ratio (was not taking out a lot of equity) but under a 1.25 ratio.


    get a valid lease in place then refi ?
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  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    2y
    Quote from @John Asher:

    Is this worth challenging or getting a second appraisal? Even with only $1000 in rent I’m still over a 1 to 1 ratio (was not taking out a lot of equity) but under a 1.25 ratio.

    A lot of investors have the equivalent of llpa’s at 1.0x, 1.1x, and 1.25x, meaning that your rate/pricing will likely be marginally different at each threshold. I doubt a second appraisal is useful. Depending on the investor, you might have some luck if you have a signed lease and 3 months of rent seasoning at the desired rental rate. The performing lease coupled with supplying your own comps that support it sometimes works. 
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  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    2y
    Quote from @Jay Hinrichs:
    Quote from @John Asher:

    Is this worth challenging or getting a second appraisal? Even with only $1000 in rent I’m still over a 1 to 1 ratio (was not taking out a lot of equity) but under a 1.25 ratio.


    get a valid lease in place then refi ?

     Yes, my lender goes by actual leases.

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  • John Asher
    OP
    Member since 2024 · 9 posts · 5 votes
    2y
    Quote from @Patrick Roberts:
    Quote from @John Asher:

    Is this worth challenging or getting a second appraisal? Even with only $1000 in rent I’m still over a 1 to 1 ratio (was not taking out a lot of equity) but under a 1.25 ratio.

    A lot of investors have the equivalent of llpa’s at 1.0x, 1.1x, and 1.25x, meaning that your rate/pricing will likely be marginally different at each threshold. I doubt a second appraisal is useful. Depending on the investor, you might have some luck if you have a signed lease and 3 months of rent seasoning at the desired rental rate. The performing lease coupled with supplying your own comps that support it sometimes works. 

     I went looking through my loan docs and the lenders site and actually can’t find anything regarding ratios. They do have a post suggesting they will do deals above a 1 to 1 ratio but give no specifics. I take issue with the comps due to the quality of the properties selected (mine is fully updated while theirs was not) and one of the properties is now an accountants office. It’s not even being used as a residential property. The appraiser also seemed to exclusively use Zillow to find properties and 2 of the subject properties had their leases end this year. 

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  • Joseph Chiofalo
    Banker · Henderson, NV · Member since 2023 · 317 posts · 74 votes
    2y

    Hi John, 

    Are you currently renting out the property? 

    Where is the property located? 

    0Reply
  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    2y
    Quote from @John Asher:
    Quote from @Patrick Roberts:
    Quote from @John Asher:

    Is this worth challenging or getting a second appraisal? Even with only $1000 in rent I’m still over a 1 to 1 ratio (was not taking out a lot of equity) but under a 1.25 ratio.

    A lot of investors have the equivalent of llpa’s at 1.0x, 1.1x, and 1.25x, meaning that your rate/pricing will likely be marginally different at each threshold. I doubt a second appraisal is useful. Depending on the investor, you might have some luck if you have a signed lease and 3 months of rent seasoning at the desired rental rate. The performing lease coupled with supplying your own comps that support it sometimes works. 

     I went looking through my loan docs and the lenders site and actually can’t find anything regarding ratios. They do have a post suggesting they will do deals above a 1 to 1 ratio but give no specifics. I take issue with the comps due to the quality of the properties selected (mine is fully updated while theirs was not) and one of the properties is now an accountants office. It’s not even being used as a residential property. The appraiser also seemed to exclusively use Zillow to find properties and 2 of the subject properties had their leases end this year. 


    If you're going for a traditional mortgage, challenging the appraisal with updated comps might work. I doubt this goes very far with a DSCR, which will have non-govt money backing it. NonQM loans aren't as regimented as conventional/govt, but the investors are much less likely to budge when there are red flags, such as a significant difference between two appraisals. They wont unsee the old appraisal. It will likely be easier to get acceptance of a more accurate appraisal with support from a performing lease. To get the underwriting based on solely a new appraisal, you'll need a ton of evidence - enough to convince an underwriter or risk officer who gets to make the call purely on internal company policy and not tied to conventional or govt published guidelines.

    All this being said, if you're already at a 1.0x with the current appraisal for the loan amount you want, going to 1.1x or 1.25x would only be marginally beneficial unless your lender wants 1.25x for some reason. 1.0x is generally enough to fund for most investors at or below 70-75% LTV. Just take the loan as is for now with a shorter prepay (say, 2 years), and then use the performing lease to refi in the future (assuming rates come down enough for this). If you want the best terms now because you dont want to refi, see what they require for seasoning for the performing lease to override the appraisal. My guess is 3-6 months.

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  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    2y
    Quote from @Devin Peterson:
    Quote from @John Asher:

    I just got an appraisal back for a property I am trying to cash out refi.  I bought it for $100k and the appraisal came back at it being worth $210k but only worth $1000 a month in rent (the rental comps are nowhere near as nice as the house in my opinion and one of them is really a house converted to an office). My application says the home should rent for $1500 and is worth $195k. Personally I wouldn’t rent it for less. I imagine this will be an issue? 

    A lender will always use the lesser of the two appraise rent schedule or leases. They do this because they side on the fence of conservatism.

    Not 100% accurate - some DSCR Lenders will use the lesser of the in-place or 125% of market rent - so in this case @John Asher if you would get it rented at $1,500 and the 1007 Market Rent is showing $1,000 - you would get credit for 125% of the market rent or $1,250 which should allow it to more easily qualify

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  • Zach Edelman
    Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
    2y
    Quote from @Robin Simon:
    Quote from @Devin Peterson:
    Quote from @John Asher:

    I just got an appraisal back for a property I am trying to cash out refi.  I bought it for $100k and the appraisal came back at it being worth $210k but only worth $1000 a month in rent (the rental comps are nowhere near as nice as the house in my opinion and one of them is really a house converted to an office). My application says the home should rent for $1500 and is worth $195k. Personally I wouldn’t rent it for less. I imagine this will be an issue? 

    A lender will always use the lesser of the two appraise rent schedule or leases. They do this because they side on the fence of conservatism.

    Not 100% accurate - some DSCR Lenders will use the lesser of the in-place or 125% of market rent - so in this case @John Asher if you would get it rented at $1,500 and the 1007 Market Rent is showing $1,000 - you would get credit for 125% of the market rent or $1,250 which should allow it to more easily qualify


    Seconding this point. Also certain lenders will either allow for you to execute a partial IO loan which is where typically the front end of the loan (5-10 years) has interest only payments. The lender can then use the interest only payments to qualify the DSCR ratio, allowing for a higher DSCR. Want to also add that certain DSCR lenders should be able to execute even with a sub 1.00x DSCR.

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  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    2y

    Get a lease in place, if you're so damn confident. 

    0Reply
  • Ko KashiwagiPro Member
    Lender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
    2y

    Hi John,

    You could challenge the appraisal and see how it goes. Typically the revision forms allow you to specify description and reasoning. Also some lenders will go up to 125% of market rent, which should make it easier to qualify. There are also "negative" DSCR programs out there that allows you to go even below 1.0 DSCR. Finding a lender with either a creative solution or lower rates seem to be key here.

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  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    2y
    Quote from @V.G Jason:

    Get a lease in place, if you're so damn confident. 


     A little aggressive and direct but to be honest totally accurate - first step here especially since you are in a refinance position is to get it rented and then challenge the market rent numbers

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    2y
    Quote from @Devin Peterson:
    Quote from @John Asher:

    I just got an appraisal back for a property I am trying to cash out refi.  I bought it for $100k and the appraisal came back at it being worth $210k but only worth $1000 a month in rent (the rental comps are nowhere near as nice as the house in my opinion and one of them is really a house converted to an office). My application says the home should rent for $1500 and is worth $195k. Personally I wouldn’t rent it for less. I imagine this will be an issue? 

    A lender will always use the lesser of the two appraise rent schedule or leases. They do this because they side on the fence of conservatism.

     Not all lenders use the lesser of the two. A few will use the higher of the two as long as there is no more than a 20% variance 

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    2y

    @John Asher

    If your goal is to maximize cash out proceeds, you can look into short term bridge financing and take out up to 80% ltv cash out or do a 75% LTV no ratio DSCR loan.

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  • Katie Smith
    Member since 2023 · 348 posts · 190 votes
    2y

    Hi John! Are you working with a broker or direct lender? This is when working with a broker comes in handy - as they can get creative with other lending channels. Some lenders will only use the monthly rental income on the 1007, and others will allow a variance if you have a current lease. I recently had a similar situation occur with one of my clients. They had a lease in place for $2,350, and the 1007 came in at $1,995. The channel we originally were going with only takes the 1007 number - we tried to dispute the appraisal with supporting comps and the fact that the appraiser completely missed a bathroom but they wouldn't increase the 1007 amount. We then moved the borrower to another channel that allows a variance AND an appraisal transfer, so they did not have to pay for another appraisal. I would try an explore another option.

    2Reply
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