DSCR - why don't all lenders calculate the same way?

Question

I gotta ask. Why in the world do all these goofy commercial lenders use DSCR calculations as part of their guidelines yet so many of them calculate it differently?
Why don't the moronic lenders just change the dscr number they'll accept?

I just did my annual check in with b2r. These goofs advertise that their dscr has to be 1.15 or better. I knew that seemed too low but had to find out how they calculated it. Turns out they take 75% of the rent and then divide PITI.

Now I've seen a ton of different lenders and several unique scenarios for how they calculated DSCR. But nobody had that ridiculous of a calculation.

I would say 70% of the lenders calculate DSCR in its truest form in terms of qualifying SFR loans.
i.e. Rent divided by PITI. And most have a DSCR requirement of 1.25 or 1.3.

A few of them will subtract 5 to 10% for things like repairs, vacancies, etc. And then their dscr number tends to be 1.2 to 1.25.

But b2r's numbers are really so inflated, it makes me wonder why these goofy lenders don't just have a standard calculation for dscr and then adjust their guideline number to their own risk tolerance.

Then they'd be comparing apples to apples.

b2r must think they're geniuses by advertising a dscr number of 1.15 - as if they're so much better than everyone else. When the reality is they have the worst tack ons of any lender I've ever seen by far. 25%????? They literally charge 8% for property management EVEN if you self manage!

Makes no sense. DSCR is supposed to provide the bank an indication of how much profit there will be for a borrower to afford to make the payments. Yet, b2r is charging 8% for PM fees. How is that showing them how much profit I have? Its a terrible comparison. They're basically suggesting that someone that is paying for PM fees (which could be at 10% of the rent or more) has the same profits that I do. When in fact, I would have 8 to 10% more than they would.

What b2r is really doing is bastardizing dscr to use it as a way for them to see whether they would make money if they were to take the loan over. Nothing wrong with that. But, again, thats not dscr.

Seems to me that someone needs call these lenders out on their dscr guidelines and someone should require these lenders to report their guidelines consistently. If you advertise DSCR as a requirement, then there should be an industry accepted standard for calculating it and then the lender should just push up their minimum number as they see fit.

So for b2r, their true dscr requirement is NOT 1.15. Its 1.45! Thats what I should see in their advertising. And then I would know that my rent divided by PITI would need to be 1.45.

Otherwise, you could technically have lenders advertising that they accept DSCR of 1.0. And they could just say that they calculate dscr at 65% of rent. Where does it end?

Can lenders advertise that they'll do LTV of 100% and then tell you that they calculate LTV as appraised value minus 20%????? Its nonsense. Where does it end?

Jeff Rabinowitz · Answer

It seems reasonable to me that the lender deducts management fees. You could decide to hire management at any time after they made the loan. If the lender had to take the property back they would be paying management fees. Just because you do not write a check to yourself does not mean that you are not doing the job of a property manager. If you had a year where you spent nothing on repairs would that mean that the property did not deteriorate in that year?

Dustin Lauer · Answer

@Mike H. Great thread. There are many terms and guidelines that our industry does not have standardized. I totally agree that some standardization is needed here. I know that a lot more clients would work with me over some other options if they fully understood the assumptions underwritten by some other lenders that might appear more attractive. Because of all the variances in the calculation Debt Service Coverage Ratios will vary depending on the amount of "debt service" per unit required by each lender. Maintenance, Capex, Vacancies, Lease Ups, Insurance Requirements, and Management Costs are all variables that will widely change the DSCR calculation. I think it is fair for Lenders to model assumptions within a portfolio as if they were to have to take the properties back in the event of foreclosure, but it would be nice for all landlords to have transparency to how this is calculated. DSCR is the main driver when underwriting the financing of a portfolio on it's global cash flow, so it's really the crux to the equation of how much a portfolio lender will give you.

Mike H. · Answer

Yea. Technically I understand the need to take out for vacancy and repairs. But there's no reason they should require you to take out for property management if you self manage. Thats just ridiculous.

Thats like saying that they want to account for repairs at 20% just because thats what they want to do. On one hand - its their money so if they want to have their own ratios, I don't have a problem with it.

But like I pointed out. The problem I have with it is that when these companies start advertising a certain industry standard calculation like LTV or DSCR, they should all follow the same method for calculating so the consumer can truly compare apples to apples.

And clearly some of these lenders are bastardized the calculation for dscr to the point that its not even remotely similar. As I said, b2r's "dscr" of 1.15 is really more like 1.45 based on how most lenders typically calculate theirs.

So are these lenders purposefully misleading the consumer? Just because b2r says this is how we calculate it, I dont' see how thats ok. Can they calculate LTV the "b2r" way as well? I don't see why that would be any different. And as soon as we go there, then it becomes a nightmare for the consumer.

Jeff B. · Answer

They should be dividing by the "mortgage payment & interest(PI)", not mortgage+taxes+insurance(PITI).

Taxes & insurance are an aside to the financing per se and relatively fixed compared to borrowed funds + various rates of interest.

Chris Mason · Answer

Hi @Mike H.,

Every sword has two edges.

• One of the biggest problems with Agency residential lending is that Fannie/Freddie guidelines are one-size-fits-all, no exceptions. Your individual lender may be a crafty bastard that figures out how to shove things into those guidelines, but for the most part they are the same.
• One of the things about commercial portfolio lending is... that there is no Fannie/Freddie, every lender just makes up whatever the heck they want, with zero consistency. So you can have 4 different commercial lenders use the exact same term, and it mean vastly different things.

So, yeah, there are pros and cons.

Mike H. · Answer

Again, the lender can come up with any requirement they want. But DSCR is an industry wide term and it really should have a standard way to calculate it so that the consumer can compare apples to apples. As it is now, these lenders are calculating it differently.

As to your suggestion that adding management fees is reasonable, thats something I would completely disagree with and here's why.
1) If I'm not paying management fees, then why should they add them on just in case I decide to go to them in the future? Thats like saying they should be able to bump up my taxes too because my taxes are going to rise eventually. And how much will they rise.

2) To your point that if the lender had to take the property back, they'd be paying them. Again, this is my whole argument with lenders use of DSCR. DSCR is NOT meant to be a lender's way to determine what their profit/loss would be if they took back the loan. Its meant to be a calculation used to determine whether the borrower has enough profit after servicing the debt to be considered a good risk. That is what every lender will tell you they're trying to do with using dscr as a guideline item - to determine my ability to pay.

And again, I go back to the fact that a landlord who actually is paying property management fees is being treated as having the same risk of repaying the loan as someone that isn't. When the reality is the self managing borrower is, in reality, making 7 to 10% MORE money than the one using property management.

So how in the world can the lender suggest that they are gauging the true risk of a borrower? I'm basically being penalized by self managing when the reality is a landlord that self manages almost always does a better job at maintaining a higher vacancy and clearly has lower costs (i.e. more profit).

Its yet another example of lenders telling people that they're doing it their way because they know lending. Even though these are the same lenders that told everyone how smart they were with all the sub prime loan products and derivatives they put together. The reality is lenders are nowhere near as logical as people tend to think. They're like any other business - they'll mislead the consumer any chance they think they can get away with it if it helps give them more profits.

What I would say, though, is I'd be extremely leery of dealing with b2r and any other lenders like them. They've got so many misleading and onerous add ons that you are going to get burned with lenders like them one way or another.

btw: Did anybody else notice that firstkey lending is no longer doing these? That was another one of these lenders that would gladly tell you that they knew what they were doing...... yea right!

Mark Creason · Answer

I agree with some of your points. I do think factors such as vacancy and property management change depending on property type and location. I do not think this bank you are referring to is calculating a DCR with using a 75% number.

Mark

DSCR - why don't all lenders calculate the same way?

DSCR - why don't all lenders calculate the same way?

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