Why do some investors care if DSCR loans are reported on credit?

Question

I have always been curious about why some investors care if a DSCR loan is reported on your personal credit?

Patrick Roberts · Answer

Lots of bad AI answers in this thread. Whether or not a DSCR loan reports on your personal credit has nothing to do with DTI. Whether it impacts your DTI depends on two variables - whether or not you PG the loan (you will have to in most cases), and the guidelines of the loan program you are qualifying for. If you are getting a Conforming, VA, or FHA loan, it's going to have an impact on your DTI, no matter what happens on your credit report.

When this topic comes up in conversations with my borrowers, 90% of the time it's because they mistakenly think that it won't affect their DTI for future loans if it's not reporting.

Jay Hurst · Answer

This is my favourite selling point that non licensed brokers use to trick borrowers into thinking that the DSCR loan is some magical loan that has zero consequence. It just BS, but borrowers believe it.

Jay Hurst · Answer

AI has a hard time picking up on these types of underwritng issues. Just fyi.

Nghi Le · Answer

There are two main reasons why not reporting to credit is a big advantage:

• If it doesn’t show on your credit, it may not affect your ability to get DTI-based loans.  This doesn't necessarily mean conventional loans, but there are bank statement loans, HELOCs, and other loan products out there that will only hit your DTI if it shows up in your credit report, regardless of whether you personally guarantee the loan.
• The more properties and loans that report to your credit, the more chances you have of something going wrong and affecting your credit.  I know plenty of great borrowers who, by no fault of their own, have a late payment show up on their credit because their ACH failed to pull and they didn’t catch it in time.  But not having these loans report to your credit, it’s much easier to maintain your credit.

Nghi Le · Answer

Using net rental income rarely works the way we want it to, in my experience.  Depends on how long the borrowers have owned it and how they filed it on their tax returns.  Managing DTI is always going to be a struggle for investors.  At some point, investors have to stop chasing conventional loans, which are not made for investors.

We probably have different clientele.  I do get the ones that you're talking about, who always want to be financeable to buy another primary, but most of mine are always looking to pull out capital out of their existing portfolio to do more projects or to build ADUs on their existing properties.  And nobody wants to pay off their 3% mortgages, so being able to get these 2nd and 3rd lien HELOCs have been valuable to them.

The majority of bank statement loans do count unreported debts against your DTI, but not all of them.  There are investment bank statement loans (not on primary residences) that will solely go off of what's on the credit report, be able to finance in an LLC, and also not report to credit.  It's not the best priced out there (still competitive to DSCR pricing), but it's just another tool in the toolbox.

Jay Hurst · Answer

When the average investor from bigger pockets tells me that lender A will not report the debt to their credit report and I ask them why that matters they do not say so I can get a 3rd postion HELOC. It is because they do not want the debt counted against them when they go to buy a primary home. (which never makes much sense anyway because the rent can be used to offset at least the majority of the payment anyway) As you know, full doc loans even bank statement loans are going to hold that debt against you no matter if on the credit report or not, and it is also fraud not to disclose it.  So, as a lending community here we really need to be honest with our borrowers.

Nghi Le · Answer

They have simplified applications (and oftentimes don't accept a 1003), and they are still pulling background checks via OFAC, LexisNexis, etc.  Sometimes those applications don't even give you a way to disclose your loans (even if you wanted to), especially the fully digital platforms.  There are lenders out there who calculate DTI in community property states by taking the debts of one spouse and counting the incomes of both spouses... which probably makes as much sense to me as the no-income loans that have started popping up again.

But I do love the Non-QM and private lending world as there seems to be a product for everything and everybody underwrites differently.  Over the past couple years, I've seen a few surprises such as HELOCs behind HELOCs (and in 3rd lien position) and 2nd lien hard money without any credit pulls (and I know some of these folks have sub-400 credit scores).  But when they are more lax in one area, they tend to be tighter in others, such as capping out at 60% LTV or rejecting a borrower who has done dozens of loans elsewhere because of a marijuana felony on their background check from 30 years ago in a state that has legalized it.

But back to the original question... yes I agree with everyone that most DTI-based lenders will still count the DSCR debt against you, regardless of whether or not it reports to your credit.  But honestly you just need to plan for things ahead of time.  If you're a married couple and one spouse doesn't work, have the non-working spouse take sole title to the property and get the DSCR loan (regardless of whether it reports on credit or not).  Then you won't have to worry about it affecting the DTI of the spouse that has income and wants to qualify for conventional loans; note that this doesn't work for FHA and VA loans in community property since you would need to include non-borrowing spousal debt.

Jay Hurst · Answer

and do those applications not ask you to disclose all loans?  and are they not pulling anti fraud reports from corelogic/lexesnexus etc and find the loans even if the docs required for underwriting do not show them?   and the answer to both is of course. I am a balance sheet lender and when I lend my funds to a borrower I do not pay to report to the credit agencies but does that means absolutely nothing.

William Thompson · Answer

Good question — that one comes up a lot.

The main reason some investors prefer DSCR loans not to report to personal credit is flexibility. When it’s off your report, it doesn’t impact your DTI ratio, which keeps your borrowing power open for future deals or personal financing.

That said, having it report can sometimes help build your credit history if you’re still early in your investing journey — so it really depends on your long-term strategy.

Are you currently using DSCR loans in your portfolio, or still exploring if they fit your goals?

William Thompson · Answer

Jay,  Totally fair point — you’re right that underwriting can vary a lot from lender to lender. My comment was meant to explain how DSCRs are typically structured on paper, but you’re absolutely right that some underwriters still treat PG-backed loans as contingent liabilities in practice.

Why do some investors care if DSCR loans are reported on credit?

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