Does a DSCR loan affect your personal credit and DTI ratio?

Denver, Colorado
Creative Real Estate Financing
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Does a DSCR loan affect your personal credit and DTI ratio?

Charles Schmidt
New to Real Estate · Denver, CO · Member since 2016 · 24 posts · 26 votes

I have been shopping around for lenders for a 20% down DSCR loan for a new short term rental property. One of them told me that if I close the loan directly into an LLC (which he confirmed they can do), then it won't affect my personal DTI ratio when I'm looking to qualify for future loans, specifically my next primary/house hack that I plan to buy at the end of next summer.

I mentioned this to another lender and he said this is not the case since it will be my LLC and is therefore still tied to my personal credit.

I plan to reconnect with both of them for clarification but wanted to see if anyone on here had experience with a similar situation.

Thanks!

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John Morelli
Lender · Deerfield, IL · Member since 2020 · 44 posts · 31 votes
4y

When using DSCR financing, even when vesting and borrowing through an LLC or other special purpose entity, you will be required to personally guaranty the loan. As a result of the PG, generally all lenders will consider this in your DTI (global debt service on commercial loans).

However, as long as your real estate investments are covering debt service at 1.25x or greater, it will wash out the DTI impact in residential lending and blend out in your global cash flow / debt service for any bank or commercial lender.

Let me know if I can be of further assistance. 

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  • John Morelli
    Lender · Deerfield, IL · Member since 2020 · 44 posts · 31 votes
    4y

    When using DSCR financing, even when vesting and borrowing through an LLC or other special purpose entity, you will be required to personally guaranty the loan. As a result of the PG, generally all lenders will consider this in your DTI (global debt service on commercial loans).

    However, as long as your real estate investments are covering debt service at 1.25x or greater, it will wash out the DTI impact in residential lending and blend out in your global cash flow / debt service for any bank or commercial lender.

    Let me know if I can be of further assistance. 

    6Reply
  • Charles Schmidt
    OP
    New to Real Estate · Denver, CO · Member since 2016 · 24 posts · 26 votes
    4y
    Quote from @John Morelli:

    When using DSCR financing, even when vesting and borrowing through an LLC or other special purpose entity, you will be required to personally guaranty the loan. As a result of the PG, generally all lenders will consider this in your DTI (global debt service on commercial loans).

    However, as long as your real estate investments are covering debt service at 1.25x or greater, it will wash out the DTI impact in residential lending and blend out in your global cash flow / debt service for any bank or commercial lender.

    Let me know if I can be of further assistance. 


     Ok that makes sense, thank you! 

    0Reply
  • Daniel Meneses
    Lender · Austin, TX · Member since 2022 · 13 posts · 11 votes
    4y

    It may also depend on if the lender sells the loan and who it is sold to. With us, if vested in an LLC it will not be reported to credit. However, if vested personally there is a chance* it will be reported depending on who the loan is sold to.

    0Reply
  • Jay HurstBusiness Member
    Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    4y

    A lot of loans are not reported on a credit report. There are plenty of small local banks who do not bother to report on credit even on a primary residence.  But, that does not mean anything. If you personally guaranteed the loan  (meaning it is a recourse loan) then you are responsible for that loan no matter if it is on your credit report or not.  

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    3Reply
  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    4y

    @Charles Schmidt  Jay's post above is spot on.  I have a number of loans that are through small local banks and not reported on my credit.  But since the rentals are on my tax returns, of course it's factored in when getting a new loan.  In fact, I just bought a new primary house and the process was harder than normal because I had to prove I had no lates for the past few years.  So it required a lot of mortgage statements!  Also the original promissory notes too.

    2Reply
  • Andrew C.
    Investor · SE Wisconsin · Member since 2019 · 111 posts · 71 votes
    4y

    What is (or is there) a process of getting out of the business of personally guaranteeing the loans? Is there a point where collectively, the LLC has income X and current mortgage debt Y, and X is >> Y, hence another RE loan fits within the LLC/partnership's ability to handle and I don't need to personally guarantee this?

    1Reply
  • Caroline Gerardo
    Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
    4y

    It doesn't matter if not on your mortgage credit report, it shows on your income taxes. 

    It doesn't matter what the loan person said. All that matters is what is in writing.  NonQM lenders sell their loans. Many lenders are going to merge and morph in this next two months due to downturns in lending.

    @Andrew C. after you bought the property and have a loan you can only get out of the personal guarantee and liability by selling, paying off in full, or refinancing to a lender who doesn't require a guarantee. 

    Multi family 100-300 units if you are a known Corporation and the LTV is very low might not require a personal guarantee.

    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    4y
    Quote from @Andrew C.:

    What is (or is there) a process of getting out of the business of personally guaranteeing the loans? Is there a point where collectively, the LLC has income X and current mortgage debt Y, and X is >> Y, hence another RE loan fits within the LLC/partnership's ability to handle and I don't need to personally guarantee this?

    We work with a community bank that doesn’t require a personal guarantee as long as the LTV is 50% or less, which works well for us.
    Private Mortgage Financing Partners, LLC
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  • Mike Mercea
    Member since 2020 · 1 post · 0 votes
    4y
    Quote from @Charles Schmidt:
    Quote from @John Morelli:

    When using DSCR financing, even when vesting and borrowing through an LLC or other special purpose entity, you will be required to personally guaranty the loan. As a result of the PG, generally all lenders will consider this in your DTI (global debt service on commercial loans).

    However, as long as your real estate investments are covering debt service at 1.25x or greater, it will wash out the DTI impact in residential lending and blend out in your global cash flow / debt service for any bank or commercial lender.

    Let me know if I can be of further assistance. 


     Ok that makes sense, thank you! 

    Covering debt service at 1.25x is only relevant for LTR’s with at least a 12 month lease signed though, correct? I’ve been trying to solve this puzzle for a while too and the issue I keep running into is more so not being able to claim Short Term Rental income until a year or two later. In that case it just looks like heavy debt and if you want to buy a primary conventional 6 months later your DTI will be all out of whack.
    0Reply
  • Dung Nguyen,
    Professional · Brentwood, CA · Member since 2016 · 2 posts · 0 votes
    3y

    Hi John,

    When you say all of my investments (rentals) have to be at 1.25x, then DTI is washed out, so would blend out the cash flow / debt service for any bank or commercial loan.... " this means that the lender is looking at our tax returns then (eg, the schedule E) of income and expenses.. IS the depreciation of that particular property counted againST our DTI ? Thanks ahead.

    0Reply
  • Jay HurstBusiness Member
    Lender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    3y
    Quote from @Dung Nguyen,:

    Hi John,

    When you say all of my investments (rentals) have to be at 1.25x, then DTI is washed out, so would blend out the cash flow / debt service for any bank or commercial loan.... " this means that the lender is looking at our tax returns then (eg, the schedule E) of income and expenses.. IS the depreciation of that particular property counted againST our DTI ? Thanks ahead.


     No, depreciation is NOT counted against you on a full document application. This worksheet is used:   https://content.enactmi.com/documents/calculators/Form1038.C...

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  • Dung Nguyen,
    Professional · Brentwood, CA · Member since 2016 · 2 posts · 0 votes
    3y

    Wow this form is so powerful ! Thank you for sharing ! It means that if something is "added back" then it does not reduce the rental-income one reported; hence meaning more is applied as " rental income sources" towards bringing the DSCR numerator up...towards the 1.25x needed for loan approval odds.

    0Reply
  • Dani Owens
    Member since 2023 · 16 posts · 6 votes
    2y
    Quote from @Don Konipol:
    Quote from @Andrew C.:

    What is (or is there) a process of getting out of the business of personally guaranteeing the loans? Is there a point where collectively, the LLC has income X and current mortgage debt Y, and X is >> Y, hence another RE loan fits within the LLC/partnership's ability to handle and I don't need to personally guarantee this?

    We work with a community bank that doesn’t require a personal guarantee as long as the LTV is 50% or less, which works well for us.

    Hi @Don Konipol, I really appreciated your comment about 50% or less LTV. How common is it to get a non-recourse DSCR loan in a case like this? Where would one find a lender like this? Any tips are appreciated. Thanks.

    1Reply
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