Why More DSCR Loans Are Falling Apart During Underwriting

Question

I’m seeing more investors get surprised lately when a DSCR deal looks solid upfront… then struggles during underwriting.

Usually because:

• rent projections were too aggressive
• reserves became an issue
• debt coverage was too tight
• appraisals came in conservative

The deals getting through cleanly seem to have much more margin built in now.

Are your DSCR deals still closing smoothly?

Mike Grudzien · Answer

Always be conservative and round down on all elements and the deal should fly through!Those that try to "push" the parameters end up with egg on their face....

Corinna Negron · Answer

We’re seeing the same trend across the market.

A lot of DSCR transactions still look workable at quote stage, but underwriting has become far more sensitive to:

• realistic market rents,
• reserve requirements,
• insurance/tax increases,
• and true debt coverage after stress testing.

The deals closing most smoothly right now usually have:
• stronger in-place cash flow
• lower leverage
• experienced operators
• and meaningful DSCR cushion beyond the minimum threshold

One of the biggest issues lately has been overly optimistic rent assumptions that don’t hold up during appraisal or final review. Once the appraisal comes in with lower market rents or higher expense adjustments, the DSCR can deteriorate quickly.

We’ve also noticed lenders becoming much more conservative on borderline files that might have passed 12–18 months ago.

Well-structured deals are still getting done consistently, but the margin for error is definitely smaller in the current environment.

Bryan Maddex · Answer

Love these general conversation starters!Usually because:

• rent projections were too aggressiveYou can counter this with shopping for HOI, going interest only, buying down the rate, putting more down, using short term DSCR options, adding in asset depletion. Sometimes the projected rent is just lower than you thought and you should walk away! Other times you may be monetizing the property is a less effective way. 
• reserves became an issueThis should never be an issue unless you end up coming out of pocket more than intended!  Many lenders have no reserve requirements. Picking the best lender for your situation is always important. 
• debt coverage was too tightI would rephrase this as getting surprised on holding costs (HOI and Taxes), or it was because rent came in too low. See 1st answer. 
• appraisals came in conservativeHappens just as often as it does with conventional loans. This is always an opportunity to try to renegotiate with your seller, or you may need additional capital to make the deal work.

Why More DSCR Loans Are Falling Apart During Underwriting

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