DSCR vs conventional loan - 3 family

Hartford, Connecticut
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DSCR vs conventional loan - 3 family

Matthew Scheer
Member since 2024 · 2 posts · 7 votes

Hi All,


I am under contract to purchase a 3 family with family members (one being my husband and the other brother in law). My husband and I will be 80% owners. We have been reaching out to lenders regarding loan terms and are getting the best offers for conventional loans to put in our personal names. We have good credit scores but are worried that down the line we'll have too much debt in our names if keep adding to our portfolio. Is it worth it to do go the DSCR route and putting loan in the LLC name with higher rates or should we just put loan in our personal names (and transfer title after the closing to the LLC)??

Morgan

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Erik EstradaBusiness Member
Lender · Member since 2022 · 6k+ posts · 1k+ votes
1y
Quote from @Matthew Scheer:

Hi All,


I am under contract to purchase a 3 family with family members (one being my husband and the other brother in law). My husband and I will be 80% owners. We have been reaching out to lenders regarding loan terms and are getting the best offers for conventional loans to put in our personal names. We have good credit scores but are worried that down the line we'll have too much debt in our names if keep adding to our portfolio. Is it worth it to do go the DSCR route and putting loan in the LLC name with higher rates or should we just put loan in our personal names (and transfer title after the closing to the LLC)??

Morgan


It makes no difference, DTI wise. You still need to sign a personal guarantee on a DSCR loan which will then legally require you to disclose the debt when you try to apply for a conventional loan. If you try to "hide it" it will be fairly easy to see you own a rental through your schedule E returns.

The benefit of a DSCR loan is the fact that you can qualify with no personal DTI. If you are currently in a spot where you can qualify conventionally, this will usually be the best choice. Once you reach the point where you can't qualify for conventional loans, then that's where you would utilize a DSCR loan.

[email protected]818-269-7983
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  • Jason Taken
    Lender · Chicago, IL · Member since 2021 · 424 posts · 145 votes
    1y
    Quote from @Matthew Scheer:

    Hi All,


    I am under contract to purchase a 3 family with family members (one being my husband and the other brother in law). My husband and I will be 80% owners. We have been reaching out to lenders regarding loan terms and are getting the best offers for conventional loans to put in our personal names. We have good credit scores but are worried that down the line we'll have too much debt in our names if keep adding to our portfolio. Is it worth it to do go the DSCR route and putting loan in the LLC name with higher rates or should we just put loan in our personal names (and transfer title after the closing to the LLC)??

    Morgan


    It's hard to answer that plainly, but the fact that one of your main concerns is DTI in the future - you should be calculating the either cash flow or total interest you'd be paying with each loan to determine if the risk/reward is there for you. If the higher rate still aligns with your strategy and it avoids the DTI issue - then that may be the right move. It sounds like though you've got some math to do to see if the extra cost makes sense and potentially reduced cash flow (if you cannot get your tenants to make up for the difference)

    0Reply
  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    1y
    Quote from @Matthew Scheer:

    Hi All,


    I am under contract to purchase a 3 family with family members (one being my husband and the other brother in law). My husband and I will be 80% owners. We have been reaching out to lenders regarding loan terms and are getting the best offers for conventional loans to put in our personal names. We have good credit scores but are worried that down the line we'll have too much debt in our names if keep adding to our portfolio. Is it worth it to do go the DSCR route and putting loan in the LLC name with higher rates or should we just put loan in our personal names (and transfer title after the closing to the LLC)??

    Morgan


    It makes no difference, DTI wise. You still need to sign a personal guarantee on a DSCR loan which will then legally require you to disclose the debt when you try to apply for a conventional loan. If you try to "hide it" it will be fairly easy to see you own a rental through your schedule E returns.

    The benefit of a DSCR loan is the fact that you can qualify with no personal DTI. If you are currently in a spot where you can qualify conventionally, this will usually be the best choice. Once you reach the point where you can't qualify for conventional loans, then that's where you would utilize a DSCR loan.

    [email protected]818-269-7983
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    3Reply
    • Trevor Higgins
      Lender · Charlotte, NC · Member since 2024 · 58 posts · 19 votes
      1y

      @Erik Estrada yes and no, while you do have to disclosure it; when using a conventional loan, a property titled in an LLC with the loan not being on personal credit is looked at differently (not a personal expense) even though you are a PG. We often have our clients use DSCR over conventional for that reason, assuming rates are similar.

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

    You should also confirm with your lender if they will allow you to QCD into an LLC after closing. .. This may cause your lender to require the full loan balance to be repaid, if you are not careful.

    [email protected]818-269-7983
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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    1y

    @Matthew Scheer Just use a conventional loan. Unless you have a lot of properties already and are close to hitting 10 conventional loans then DSCR makes no sense. You didn't mention a BRRRR strategy or cashing out the 2 unit (refinancing) so just stick with conventional.

    Your future DTI shouldn't be an issue you save cash-flow and handle your personal finances correctly. Banks typically allow you to use 75% of your gross rental income to qualify for loans. Especially if you have a signed lease agreement. Some banks may even require that, but if you stay under levered, and keep reserves, I would tap out the golden tickets (10 per person). Conventional loans generally have the best terms. Annoying to apply for but worth it in the long run.

    Call your bank. If you QCD a property into an LLC, and the lender finds out sometimes they have a due on sale clause. We spoke with our lender they don't even care! In fact they emailed us a form to complete so they know, and have it in there records. Every lender is different. Something to consider if you're trying to protect your assets.

    3Reply
  • Devin PetersonBusiness Member
    Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 667 votes
    1y
    Quote from @Matthew Scheer:

    Hi All,


    I am under contract to purchase a 3 family with family members (one being my husband and the other brother in law). My husband and I will be 80% owners. We have been reaching out to lenders regarding loan terms and are getting the best offers for conventional loans to put in our personal names. We have good credit scores but are worried that down the line we'll have too much debt in our names if keep adding to our portfolio. Is it worth it to do go the DSCR route and putting loan in the LLC name with higher rates or should we just put loan in our personal names (and transfer title after the closing to the LLC)??

    Morgan


    Matthew! Always worth it to evaluate your loan options and price out a few different scenarios. DSCR loans in particular are more advantageous from an underwriting and asset protection standpoint.

    ALSO! I am super close to you! Local Middletown resident myself so I work with a ton of great investors in the state. I am happy to connect you with any resources that you may need!

    [email protected]860-538-3672
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    0Reply
  • Derek BrickleyBusiness Member
    Lender · Ann Arbor, MI · Member since 2021 · 668 posts · 227 votes
    1y

    Hey Matthew!

    Already been said but it just depends your goals. Conventional would require 25% down but you could do 20% or 15% down payment on a DSCR loan. DSCR loans may see better terms depending on the situation because you'd also have the ability to take a prepayment penalty if it fits your strategy.

    A DSCR loan allows you to vest the property into the LLC, but the mortgage is in your personal name(s). What will help with the debt in your personal names is how your CPA/accountant structures your business returns at the end of the year. For my own investing we use conventional loans as much as possible, however in Michigan where we invest prepayment penalties aren't as flexible. A lot of the investors we've worked with recently in CT elect either a 1 year or 3 year prepayment penalty to save more of their capital upfront and keep the terms comparable.

    Happy to go through some details for you though if that's helpful! Feel free to reach out

    [email protected]734-645-7722
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    0Reply
  • Kate Nixon Taylor
    Lender · Cary, NC · Member since 2021 · 122 posts · 29 votes
    1y

    Hi Morgan,

    It sounds like it makes sense right now to stick with the conventional loan. In the future, when your DTI doesn't qualify, thats when the DSCR loan becomes super useful! Definitely ask the lender you work with if they are okay with moving the property into an LLC. When you have a larger portfolio down the line, you will probably want to restructure ownership of the properties and you can always refinance then into DSCR loans.

    I'd love to connect and stay in touch! You're welcome to reach out anytime.

    Cheers, Kate

    0Reply
  • Frankie VozziBusiness Member
    Member since 2025 · 347 posts · 88 votes
    1y

    Hey Matthew! I sent you a DM let's connect!

    [email protected]516-888-7750
    0Reply
  • Andrew Zamboroski
    Lender · Member since 2021 · 495 posts · 130 votes
    1y
    Quote from @Matthew Scheer:

    Hi All,


    I am under contract to purchase a 3 family with family members (one being my husband and the other brother in law). My husband and I will be 80% owners. We have been reaching out to lenders regarding loan terms and are getting the best offers for conventional loans to put in our personal names. We have good credit scores but are worried that down the line we'll have too much debt in our names if keep adding to our portfolio. Is it worth it to do go the DSCR route and putting loan in the LLC name with higher rates or should we just put loan in our personal names (and transfer title after the closing to the LLC)??

    Morgan

    As others have mentioned, a conventional loan is often the best choice for many good reasons. This is especially true on more straightforward purchases. 

    Some reasons DSCR loans may make sense:
    - lower downpayment in situations like this (2-4 units)
    - income verification is a problem
    - entity members feel more comfortable vs you buying personally and leaving someone off mortgage and/or title
    - using the highest of guarantor scores for credit to price the loan vs the lowest.

    Good luck! Reach out if we can help.
    1Reply
  • Drew SygitBusiness Member
    Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
    1y

    @Matthew Scheer please define your understanding of, "too much debt in our names".

    Any mortgage debt in your names will be offset by the rental income. 

    To qualify for additional mortgages, FNMA allows eiter 75% of a lease to offset mortgage PITI

    OR

    What shows on your Schedule E, adding back the "paper" loss of depreciation.

    It CAN get a little tricky applying for car loans and such, but you just need to include the rental income in your gross income or under whatever other option that lender allows.

    [email protected]248-209-6824
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  • Sasha MohammedPro Member
    Lender · Costa Mesa, CA · Member since 2018 · 337 posts · 245 votes
    1y

    just to reiterate what everyone above has already said - there's no one answer for everyone. pros and cons to both loan types. 

    DSCR skips the DTI, shouldn't appear on personal credit, allows you to close in an LLC. But you typically pay points and have prepayment penalties.

    Conventional will give better rates most of the time, and no PPP, but moving to an LLC after the fact opens the risk of a due-on-sale clause. also the debt does appear on personal credit, and could affect (effect?) your finance-ability later.

    bottom line is there's no "right" or "wrong" answer here. both are tools. just don't expect to use a hammer when a screwdriver is necessary. understanding the differences will help you decide what the right fit is. 

    [email protected]949-351-1338
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  • Jake YuskaitisBusiness Member
    Lender · New Jersey, USA · Member since 2022 · 254 posts · 67 votes
    1y

    I would ALWAYS put investment properties in an LLC so you protect yourself legally.

    [email protected]551-287-6884
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  • Stacy RaskinBusiness Member
    Lender · Member since 2022 · 1k+ posts · 510 votes
    1y

    A couple of items to consider including loan program options. For conventional loans you can't put the property in an LLC.

    DSCR loans can be helpful if you don't have the debt to income ratios to work or you have issues with demonstrating income. This often happens with people who don't have traditional W2 jobs. Many self employed people or business owners write off quite a bit of expenses which reduces their net income on their taxes which is used for the self employed or business owner in how a conventional income loan is calculated.

    Also, DSCR loans are less paperwork especially if an investor has multiple properties (the less paperwork is significantly less when an investor has multiple properties but is less when comparing a one property conventional loan to a DSCR loan).

    Generally DSCR loans require a personal guarantor. Some DSCR lenders will not report the DSCR loan to credit bureaus but that varies. Working with a mortgage broker can be helpful as they have relationships with non-qualified (Non-QM) lenders that can help an investor get better LTVs and underwriting guidelines. Lenders who specialize in non-QM loans generally have better guidelines for investors. This is compared to large banks or credit unions or generally don't have as good as terms. It may be because many lenders sell their loans at the end of the loan process to replenish liquidity for new loans so the non-QM lenders have investors who are willing to buy these loans while these other companies don't. Non-QM lenders generally don't advertise directly to the public which is why working with a mortgage broker can be helpful.

    There are DSCR lenders for 1-4 units who have 20% down programs for 680+ middle mortgage FICO scores.

    Happy to connect to discuss further. 

    [email protected]818-770-0340
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