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.

Shahrouz S. · Answer

That’s a great breakdown, @Doug Smith! The “math quits mathing” part really explains why so many investors eventually move toward DSCR once they start scaling!

Doug Smith · Answer

I have to address the question “Conventional or DSCR” a lot. Here’s a concept that is worth understanding. Conventional Financing does a “Global Cash Flow”, where we look at your regular or business income and debts in addition to the property cash flow. Conventional Guidelines usually want to see a DTI of 43% or less (in reality, it’s 50% or less…but that’s for another post. That’s where scaling becomes difficult with conventional financing. Here’s a conceptual example.

Let’s say that you make $1000/mo (yes, I know that’s ridiculous, but it makes the math easy in your head). 43% of that amount $430/mo, so in this example, you can have no more than $430 going out the door in principal, interest, taxes, insurance, HOA payments, credit card payments, car loan payments, student loan payments…you get the idea. Once again, I do realize that in the real world 43% isn’t the hard stop for conventional financing, but that’s what the guidelines suggest. Now, let’s say you find a property that brings in another $1000/mo and the PITI+HOA is only $800/mo. That means you are positively cash flowing $200/mo (yes, I know there are other costs to consider…let’s remember this is conceptual). Sounds like a good deal, right? Now, let’s look at how a Conventional Loan would cash flow it. $1000 in current income plus $1000 in new rental income = $2000/mo. $430 in current debt plus $800 in new debt = $1230 in new debt payments. $1230/$2000 = 61.5%. Although you have a positive cash flow, Conventional guidelines will have you jumping from 43% to 61.5%...you no longer qualify. For a conventional loan.

The rates is, indeed ½% to 1% better right now with a Conventional Loan vs a DSCR loan, but at some point, regardless of your income level, the “math quits mathing”. That small rate difference is not as big of a deal as you might think and the DSCR will allow scale.

If you can do a Conventional Loan, then great, but understand how the math works and realize that, if you’re going to scale, you’ll need alternatives to Conventional Financing.

I hope that helps a bit.

Shahrouz S. · Answer

How does refinancing work differently for co‑living rentals, and what is the most appropriate refi strategy? I’ve heard mixed feedback on whether a co‑living single‑family home can qualify for conventional financing, and my understanding is that the main challenge is appraisal, since appraisers may use nearby homes of similar overall size rather than comparable bed/bath counts, which I am comfortable with. Given that, would you lean toward a DSCR loan, despite the typically higher interest rates, or pursue a conventional refinance if the property qualifies? Are there any other loan structures you’d consider for a co‑living property, assuming high credit scores and a strong overall financial profile?

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

DSCR or conventional refi?

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