DSCR ( Debt Service Coverage Ratio ) - Investor Loan
As an investor and lender, I see that a lot of people are not familiar with DSCR loan. Its a great program, specially self-employed people, which often find it difficult to get qualified for a mortgage. So I decided to make a short post about this program. Please feel free to add any extra information or tips you might have.
DSCR loans were designed for real estate investor in mind, which often buys in LLCs. Often self-employed people have a hard time getting conventional finance due to tax returns being difficult to decipher — this product does not require a tax return review. For income verification, DSCR loan underwriting focuses on the rental income (in-place or potential) that the property can produce. After allocations for property taxes and insurance, the underwriter calculates a Debt Service Coverage Ratio for the property, which is a key factor in the product's pricing. To determine value and rent, DSCR lenders require a full interior 1004 form appraisal, as well as Single-Family Comparable Rent Schedule. The loan product is generally full recourse to the members of the LLC that own the property, and of course their FICO is also a key factor in the product's pricing. Your score can be as low as 620, but you will be paying a higher prince and rate so keep that in mind.
The minimum DSCR ratio can go as low as 0.75x
So here is the Formula for you to see if it works for you:
DSCR = NOI / by Annual Debt Payments (AKA "Debt Service" or just "Debt Payments")
Net Operation Income (NOI) = Annual net income + depreciation + interest expenses + amortization and other non-cash items
Debt Service:
Add up one year’s worth of principal repayment + interest payments + lease payments
I'd add that you can find lenders that do not require a debt-service ratio (ie: they will go under .75), however they often require a higher down payment and the interest rate will be a bit higher as well. The 0.75 - 1.00 range is pretty good standard.
Also, the funds to purchase must come from the person(s) on the loan. They cannot be gifted! I've seen this come up all too often.
Question. I am looking at dscr for commercial property, due to SBA allowing me to do 10% down instead of 25% that's what I'm leaning towards, I'm also using 1.35 bc is SBA. But I'm having a hard time finding property that meets thus simple requirement. Any idea or recommendations of what else I should keep in mind when looking at commercial properties?
Quote from @Alexandra Rolon:
Question. I am looking at dscr for commercial property, due to SBA allowing me to do 10% down instead of 25% that's what I'm leaning towards, I'm also using 1.35 bc is SBA. But I'm having a hard time finding property that meets thus simple requirement. Any idea or recommendations of what else I should keep in mind when looking at commercial properties?
Hi Alexandra,
I'm not sure about the guidelines on commercial properties. I only do residential, you would have to ask a commercial lender. Hopefully, a commercial lender from BP can answer your question.
Are there any debt service loans that do not require a personal guarantor? I would like to utilizze one of these loans for a short term rental property but I do not want to personally guarantee the debt. If the property has 70% or lower LTV does that make a difference?
@Jonathan Pflueger
So on DSCR loans the Underwriter will use the monthly income generated by the property as collateral, so it wont require personal guarantee. As long as the income generated by the property covers PITI is enough to qualify and of course the property needs to pass appraisal inspection. Other than that the terms are similar to a conventional loan. You will need 20% DP + 2.5 - 3% closing cost. Also, the rates will be higher since its an investment property, but you can always refinance later.
Interesting. Do you know anyone who lends in CA that could do a debt service loan without a personal guarantee of any kind?
Absolutely, I can refer you to one of my team member licensed in CA. You can send me a DM and I can get you in contact with them.
@Jonathan Pflueger
Absolutely, I can refer you to one of my team member licensed in CA. You can send me a DM and I can get you in contact with them.
Looking for DSCR loan in Iowa - @Vinnie Da silva can you hook me up?
Quote from @Alexandra Rolon:
Question. I am looking at dscr for commercial property, due to SBA allowing me to do 10% down instead of 25% that's what I'm leaning towards, I'm also using 1.35 bc is SBA. But I'm having a hard time finding property that meets thus simple requirement. Any idea or recommendations of what else I should keep in mind when looking at commercial properties?
Its important to distinguish between the gross income DSCR the OP is posting about and your SBA 1.35x DSCR, thats a true DSCR commercial calculation based on property annual gross income - annual operating expenses = net operating income (NOI) annual / debt service annual payment = needs to be 1.35X or higher to qualify. The Gross income DSCR products are based off of a pure gross income/leases over the monthly PITIA or prin/int/taxes/insurance/assessments (not true operating expenses). Gross income DSCr products lend so long as your income is .75-1.00x of your PITIA. The higher the DSCR ratio the better the terms/pricing.
If you dont meet this form of commercial DSCR you'll have to lower your loan amount on the purchase (IE you gotta bring in more equity), and on a refinance this means you may need to bring in cash to pay down your loan to an acceptable LTV whereby the cashflow meets the 1.35X or better.
So what can an investor do ? You can raise rents, secure a new commercial lease, or reduce operating expenses to improve your NOI calculation and justify it to your commercial underwriter such that your formula of NOI / debt service is now 1.35X or higher.
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Quote from @Jonathan Pflueger:
Interesting. Do you know anyone who lends in CA that could do a debt service loan without a personal guarantee of any kind?
Hey guys, any luck finding a lender that doesn't require a personal guarantor for investing in short term rentals?
@Vinnie Da silva
I’m intrigued as well I’m in the military stationed in Hawaii right now, but I found a property in the Houston area that has good returns. Just needing to see how to get help with the financing portion of it. Thank you
Quote from @Enrique Enrique:
Hello Vinnie, the only time I've heard the use of debt service is when the property is greater then 5 units. A DSCR is arrived at after subtracting PITI & a realistic operating expense not a percentage. The income divided into the net must equal say $1.25 in come to $1.00 in debt.
Not to get into an argument but that's not true. Any time I'm buying a rental property, my bank is going to look at the DSCR. I just bought a triplex next to some properties of mine (just so I could have the extra land) and my bank financed based on 70% of the appraised value, or a 1.25x DSCR -- whichever was less. It could be a single family or a triplex.
The main difference you see between 4 and 5 units is the type of financing. It's easier to get vanilla Freddie 'quicken loans' type financing on 1-4 family where 5+ will normally require a local bank or lender who holds the debt (vs. just originating the loan and selling it off)
Quote from @Payton Haynes:
@Vinnie Da silva
Hey Payton, Just look for a loan officer in Houston that offers DSCR loan they will be able to help you. They will be able to run the numbers for you.
I’m intrigued as well I’m in the military stationed in Hawaii right now, but I found a property in the Houston area that has good returns. Just needing to see how to get help with the financing portion of it. Thank you