Little discussions on DSCR loans...

[Joshua Bailey]

Looking into DSCR loans and they seem to be a pretty good option for someone starting out. Why is there little discussion on these loans. Is there a catch or am I missing something?

[Chris Mason]

It's a smaller niche than you'd think. "Starting out" is a fairly broad category, and includes folks in the following 2 buckets:

1) "Meh" income, so they only have 3.5% or 5% down. They can't get a DSCR loan due to the small down payment.

2) "Strong" income, so they both have 20% to 25% down, and don't need a DSCR loan, they can get a normal conventional loan. The income drives BOTH the ability to get a 'normal mortgage' AND having that down payment.

Income and down payment availability are pretty strongly tied together. DSCR loans appeal to those that have the cash for the down payment, but income disproportionately low to that savings. OK, so who is in that group.

1) Folks that had a windfall. Yup, totally.

2) Newly self employed folks that had an amazingballs year 1, but year 2 isn't done so they can't get a normal mortgage. These are fewer in number than you think, but yes it's a good match for them. Most commonly this is someone seasoned in the widget business, who just opened their own widget shop, and they aren't saddled with 15 layers of middle management, so the new business might not do as many units of widgets, but those widgets they do sell, the business reaps the profits that otherwise would have been paid out to useless middle management. Lean & Mean small businesses with stellar profit margins due to few/no legacy liabilities. For every 1 person that meets this new "Lean & Mean small business model" AND wants to invest in real estate (rather than focusing on their HIGHLY profitable new business), there are about 30 people like this: A lot of folks will say "my business is doing great, it just doesn't look that way on tax returns." But then in answer to the very next question about how much they have to put down, they don't really have anything near 20% or 25% down, so maybe those tax returns aren't so inaccurate after all, eh? 

So, yes, DSCR loans are awesome, when they are the right fit. But those numbers are fewer than you think. Think about Sally and her new widget business running at (to her) an established 50% CoC ROI, she's got no problem with the down payment (obviously!).... but her attention is probably (rightfully?) focused on that booming business of hers (hey, and power to her btw), a new real estate venture represents risk that she has no incentive to take on (she can ALREADY put $ to work earning 50%!), so why would she call me to talk about buying a rental triplex?

Let's put it another way. @Jay Hinrichs commented in this thread, and would be a phenomenal candidate for a DSCR loan. I'm pretty sure the down payment isn't a problem, and I'm pretty sure he'd have a hard time getting a "traditional" mortgage because, without even seeing them, I'm sure his tax returns are (from a 'traditional mortgage' perspective, but not otherwise) a hot mess. And he knows me. But he's not calling me for a DSCR loan on a triplex. Why not? His existing business is booming, to someone like that a (what he might regard as, but this isn't actually a quote) "stupid little triplex" is a waste of his time.

TLDR: People that are a good fit for DSCR loans don't want them. People that want a DSCR loan can't get them. Boom, just described >80% of the folks out there. For the other 20% (made up ballpark percentages), yes, they are a great fit.