DSCR or conventional refi?

Question

We purchased a rental in VA (live in NC) and established a VA LLC. We bought it with 40% down in cash and the remainder using private money. It now has 6 months or rental history (more if you include the previous ownership) and we need to refi the private money loan. What would you do? A DSCR loan — even though the rates are higher — or a conventional refi? Any other option you’d consider. (High credit score and a strong financial portfolio). Thanks in advance!

Patrick Roberts · Answer

Is the title to the deed currently held by the LLC? If so, you wont be able to get a Conventional loan without moving title back to your individual ownership.

Apples to apples, Conventional typically offers a marginally better deal than a DSCR from a bang-for-the-buck perspective. However, if your entity currently owns this property, I would just use a DSCR. After you account for the costs and headaches of transfering ownership, it likely wouldnt be worth it.

Patrick Roberts · Answer

If you personally guarantee a loan (like what's required by most DSCR's and RTLs), it will impact your DTI no matter who the loan is made to or what type of loan it is. It may not report as a trade on your credit report, but this is not the same as not impacting DTI. You will be required to disclose any debt and liabilities on a future mortgage application, which includes this loan.

If the loan is made to an entity with a PG from you, then once it has been paid directly by the entity for 12 consecutive months and included in the business cashflow workup, it may be excludable from DTI for Conventional loans. This varies by loan program. Business debts like this cannot be excluded from some other loans programs, no matter who pays them. For instance, with VA, if there is a possibility that you could be called on to pay a debt at any point, then it must be included in your liabilities.

I seen this a thousand times on here. If you PG a DSCR loan, it will impact your DTI for at minimum the next 12 months, no matter whether it reports on your credit report, and no matter what the broker/lender tells you. The only way to avoid this a nonrecourse loan.

If you dont believe this, google the URLA/1003, look at the Declarations page (Section 5), and read through section 5b. The very first questions asks this. If you have guaranteed a loan and do not disclose it, it's mortgage fraud.

Upen Patel · Answer

@Holly Calabro

It comes down to hold you want to continue holding the property. If you want to keep in the LLC, DSCR is the answer. If you are willing to move title to your personal name, you can go the conventional route.

With DSCR you will have a pre-payment penalty (PPP) to get a lower rate. 5 yr PPP will get you the lowest DSCR rate.

Conventional doesn't have any PPP, but will be underwritten based on your overall DTI.

Hope this provide a bit more clarify.

J Castro · Answer

Hi @Holly Calabro welcome to BP!

As a real estate investor, you should generally purchase properties under an LLC to protect your personal assets from liability related to the investment, while buying in your name may seem simpler and potentially cheaper (in the savings on interest) but exposes your personal wealth to financial and legal risks. With that said if your intentions are to continue buying and holding investment properties, having them in an LLC would be the way to go.

Yes, your interest rate may be a little higher depending on the lender you go with and your loan terms, but just as @Doug Smith said "The yields between conventional and non-qm (including DSCR) have compressed and we're seeing that DSCR is, in a lot of cases, more attractive than conventional financing."

@Erik Estrada brought out another good point "The main reasons you would want to go with a DSCR instead of a conventional loan are the lower seasoning requirements to cash out, you can't qualify traditionally, and you want to close the property in an LLC." If the property cash flows really well, a DSCR loan is a great option as you can also do a cash-out - "BRRRR" and continue expanding your portfolio.

There are many great replies and points here! It all really depends on your goal, where do you want to take your real estate investment venture to? Good luck on your venture.

Alexis Sostre · Answer

You will need to move title back to IO. Since you have a high credit score and strong portfolio, I’d first see if you qualify for a conventional refi in your personal name (best rates and terms). If debt-to-income doesn’t work, or if you want to scale fast and keep things clean inside the LLC, then go DSCR.

If the property cash flows really well, a DSCR is a great long-term tool (and it won’t “clog” your personal DTI). But if this is just about paying off private money and locking in the cheapest long-term debt, conventional wins every time.

Bridget Brick · Answer

@Holly Calabro Conventional will offer a lower rate by 1-2%. But require higher paperwork to close and likely take your income into considerationDSCR will allow you to close in an LLC, keep this loan off your credit, leaving your DTI and borrowing unaffected. They will not ask for your income, W2s, tax returns, or employment verification.You have to decide which is more important lower rate and slightly lower payment, or ability to scale leaving your personal credit unaffected.Second option is to consider a HELOC on your investment property, we can go up to 90% combined LTV, 2nd position, min loan amount $50k, term length 10-30 yrs

Gene K. · Answer

We have seen rates come down on DSCR products (sometimes beating conventional rates) esp for top tier borrowers. I agree that I wouldn't want to "clog" my personal DTI and wait 2 months if private lending is comparable in terms.

Chris Seveney · Answer

Agree with Eric that we just got someone a DSCR loan and it was very comparable to conventional especially with the lower ltv

as Mentioned it also does not go against your dti

Doug Smith · Answer

The yields between conventional and non-qm (including DSCR) have compressed and I'm seeing that DSCR is, in a lot of cases, more attractive than conventional financing. We just closed a DSCR purchase in FL this week at 70% LTV (customer put a bit more down) at 6.75% with 0.6% in points. For an investment deal, I thought that was pretty solid. DSCR isn't necessarily higher. As a matter of fact, I'm seeing the opposite right now.

DSCR or conventional refi?

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