Does anyone have experience using DSCR Loans as a cash out refinance option?
Rental Property Investor · Orange County CA, Mohave County AZ · Member since 2023 · 4 posts · 3 votes
Does anyone have experience using DSCR Loans as a cash out refinance option?
Most Popular Reply
Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes@Richard Ruedas thanks for the post. And yes, DSCR loans are the lifeblood of many investors. Even if you can use a standard Fannie/Freddie loan...you can only use them 10 times. So, you'll have to use DSCR loans anyway if you become that successful (and here's wishing that you will!). I have used DSCR loans on several of my own properties and they are significantly easier to get...but the rate and terms are different. Here's what I mean:
Generally speaking there are 2 main types of loans for investors: “Conventional” and “Portfolio”
Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.
Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a DSCR loan will come with some type of prepayment penalty. These loans are usually .5% higher than the Fannie/Freddie money. It's easier to get, but slightly more expense.
You can certainly use DSCR money on your 1st or 20th BRRRR property home.
27 Replies
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
If the property cash flows, you can do this. Lenders can typically take out 75% LTV.
- Investor · Fort Lauderdale, FL · Member since 2020 · 1k+ posts · 755 votes3y
Quote from @Richard Ruedas:
Looking for general information or advice on using DSCR Loans as a cash out refinancing. If you have used this option before or are a lender who has helped clients with this type of product please comment.
I am looking at using this type of loan for BRRRR projects and would like to see if it's a strategy that could work.
Hi I have done this on my duplex in Fort Lauderdale in 2021. Got a great rate of 4.125% at that time but right now you're probably going to be around 7.5-8.5% if you cash out 65-80% of the value of the home. It is a pretty easy process. You just need to show proof that you collected rent (not just have a lease in place), your expenses, etc. and you'll get it.
- 3yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Richard Ruedas thanks for the post. And yes, DSCR loans are the lifeblood of many investors. Even if you can use a standard Fannie/Freddie loan...you can only use them 10 times. So, you'll have to use DSCR loans anyway if you become that successful (and here's wishing that you will!). I have used DSCR loans on several of my own properties and they are significantly easier to get...but the rate and terms are different. Here's what I mean:
Generally speaking there are 2 main types of loans for investors: “Conventional” and “Portfolio”
Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.
Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a DSCR loan will come with some type of prepayment penalty. These loans are usually .5% higher than the Fannie/Freddie money. It's easier to get, but slightly more expense.
You can certainly use DSCR money on your 1st or 20th BRRRR property home.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes3y
I haven't done it, but it should work. They are long term loans for non-owner occupied. As long as the numbers work out it should be okay. Since there is isn't a true "standard" for these loans, talk to several lenders and see what are their terms and limitations. Make sure they don't have any issues with seasoning Title period, for example.
Good luck.
- Lender · Tampa/St. Petersburg/Sarasota FL and Knoxville/Sevierville/Maryville, TN · Member since 2018 · 361 posts · 178 votes3y
Quote from @Richard Ruedas:
Looking for general information or advice on using DSCR Loans as a cash out refinancing. If you have used this option before or are a lender who has helped clients with this type of product please comment.
I am looking at using this type of loan for BRRRR projects and would like to see if it's a strategy that could work.
Hi @Richard Ruedas, we use these loans and I specialize in them. The main problem I see is most with interest rates being higher than 2 years ago, properties are not cash flowing the way the funds need, and the investors like. We are still closing them every week, it is just being aware of what your cash flow will be as well as what the pre-payments are.
- Lender · San Clemente, CA · Member since 2017 · 77 posts · 35 votes3y
Quote from @Richard Ruedas:
Looking for general information or advice on using DSCR Loans as a cash out refinancing. If you have used this option before or are a lender who has helped clients with this type of product please comment.
I am looking at using this type of loan for BRRRR projects and would like to see if it's a strategy that could work.
- Lender · San Clemente, CA · Member since 2017 · 77 posts · 35 votes3yAll I am doing these days are DSCR loans; think of it as a stated income loan. You don't need tax returns or W-2's to show income. You just need rental income, (I can even use a rent survey if it is unleased). I can pair the DSCR with a 40 yr. interest only loan to increase your cash flow.
- 3yBrittany MinocchiBusiness MemberLender · Massillon, OH · Member since 2022 · 1k+ posts · 486 votes
Very popular strategy for BRRRRs. Investors will buy a property that needs work, rehab it, rent it, refinance into a DSCR loan and use the cash out toward another property. This loan type uses the potential income of the property to qualify you instead of employment and income documentation. The lender wants to see that you bring in enough rent to at least cover your principal, interest, taxes, insurance and association fees. Plan for somewhere around 70-75% LTV (depending on your credit and a few other factors), a bit higher of a rate compared to a conventional loan and a prepayment penalty. Some lenders want to see 90 days seasoning on the title, others 6 months, others a year.
Brittany Minocchi - Barrett Financial Group, LLC522 Reviews - Warsaw, IN · Member since 2017 · 229 posts · 270 votes3y
@Richard Ruedas like others have said I've done this too. It works like any other cash out refi-lenders LTV terms and prevailing interest rate.
In my case it was a cash out refi to fix the foundation in the same house. The lender was happy to get me further in debt and improve the property.
In my experience, DSCR loans reset interest rates every 60 months, so while you could do it today, it's probably the worst time in the past 10-15 years to do so.
- Member since 2023 · 114 posts · 36 votes3y
I am currently in the process of doing a DSCR loan. My lender wanted a 3month seasoning period which ends by July 15th. Yes, the interest rate is higher and comes with pre-payment penalties.
- Real Estate Broker · Los Angeles, CA · Member since 2013 · 9 posts · 4 votes3y
@Richard Ruedas we do a lot of DSCR loans for our mortgage clients and its definitely a great strategy when you dont show too much income on paper. I used it for one of my joshua tree airbnbs, I bought it and fixed it up, then cashed out with a DSCR investor loan
- Los Angeles, CA · Member since 2023 · 16 posts · 0 votes3y
Quote from @Jerardo Linares:
@Richard Ruedas we do a lot of DSCR loans for our mortgage clients and its definitely a great strategy when you dont show too much income on paper. I used it for one of my joshua tree airbnbs, I bought it and fixed it up, then cashed out with a DSCR investor loan
Hi Jerardo,
Can the DSCR loan cover a multi-family loan of 12-22 units? How much is the DSCR limitation? Also, do you know any other loans that can cover 22 units regards of the price of the building if it has great cash flow?
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes3y
@Hawazin Alabbasi The ins and outs of a commercial loan over 8 units can be similar to DSCR BUT generally the DSCR loans lenders offer and speak about here only apply to up to eight units. 12-22 is multifamily and may be saleable to Fannie Freddie if the property cash flows, meets minimum loan amount, similar loan to value. Multifamily and commercial loans are not 30 or 40 year they are often due in five years and you keep re-qualifying and refinancing. How long have you operated?
@Richard Ruedas DSCR borrower needs good FICO, rents are verified by appraiser and you show the leases, are offered in 30 and 40 year terms often have a prepay. Property meets health and safety codes in good to great condition.
- Los Angeles, CA · Member since 2023 · 16 posts · 0 votes3y
Quote from @Caroline Gerardo:
@Hawazin Alabbasi The ins and outs of a commercial loan over 8 units can be similar to DSCR BUT generally the DSCR loans lenders offer and speak about here only apply to up to eight units. 12-22 is multifamily and may be saleable to Fannie Freddie if the property cash flows, meets minimum loan amount, similar loan to value. Multifamily and commercial loans are not 30 or 40 year they are often due in five years and you keep re-qualifying and refinancing. How long have you operated?
@Richard Ruedas DSCR borrower needs good FICO, rents are verified by appraiser and you show the leases, are offered in 30 and 40 year terms often have a prepay. Property meets health and safety codes in good to great condition.
Hi Caroline,
According to your comment " 12-22 is multifamily and may be saleable to Fannie Freddie if the property cash flows, meets the minimum loan amount, and similar loan to value. Multifamily and commercial loans are not 30 or 40 years they are often due in five years and you keep re-qualifying and refinancing." so I need to multiply the cash flows yearly by 5 years and check if it is the same price as the property? That's what you mean? Here is the information, can you please tell me, if this meets the minimum of the loan? And how do the loan lenders calculate the value?
FINANCIAL SUMMARY (ACTUAL - 2022)
ANNUAL ANNUAL PER SF Gross Rental Income $265,184 $18.52 Other Income - - Vacancy Loss - - Effective Gross Income $265,184 $18.52 Taxes $59,701 $4.17 Operating Expenses $47,573 $3.32 Total Expenses $107,274 $7.49 Net Operating Income $157,910 $11.03 PROPERTY FACTS
Price $5,100,000 Price Per Unit $318,750 Sale Type Investment Cap Rate 5.93% Gross Rent Multiplier 12.95 No. Units 16 Property Type Multifamily Property Subtype Apartment Apartment Style Low Rise Building Class C Building Size 14,320 SF Average Occupancy 100% No. Stories 2 Year Built 1963 - Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes3y
$3,825,000 loan amount PITI is $34900 monthly
Your monthly rents stated are $22,098 it does not cash flow at 75%
$2,295,000 probably maximum loan as PITI is $23000
Over 8 units is commercial. Loans are due in full in five or seven years. At the end of the five years you must refinance or sell. This is why many commercial office/retail/multifamily are in trouble- the rate is high and hard to cash flow. No I do not mean "you need to multiply cash flows..."
Value for commercial weighs on the rents, then Class, then comparables which is different than residential. If this is a purchase you need a huge down payment, if a refinance then your valuation is way too high and won't appraise for $5,1
- Los Angeles, CA · Member since 2023 · 16 posts · 0 votes3y
Quote from @Caroline Gerardo:
$3,825,000 loan amount PITI is $34900 monthly
Your monthly rents stated are $22,098 it does not cash flow at 75%
$2,295,000 probably maximum loan as PITI is $23000
Over 8 units is commercial. Loans are due in full in five or seven years. At the end of the five years you must refinance or sell. This is why many commercial office/retail/multifamily are in trouble- the rate is high and hard to cash flow. No I do not mean "you need to multiply cash flows..."
Value for commercial weighs on the rents, then Class, then comparables which is different than residential. If this is a purchase you need a huge down payment, if a refinance then your valuation is way too high and won't appraise for $5,1
That's right, but also there are loans for the down payment. I think is better to start with a small investment, then go up.
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes3y
Quote from @Hawazin Alabbasi:
Quote from @Caroline Gerardo:
$3,825,000 loan amount PITI is $34900 monthly
Your monthly rents stated are $22,098 it does not cash flow at 75%
$2,295,000 probably maximum loan as PITI is $23000
Over 8 units is commercial. Loans are due in full in five or seven years. At the end of the five years you must refinance or sell. This is why many commercial office/retail/multifamily are in trouble- the rate is high and hard to cash flow. No I do not mean "you need to multiply cash flows..."
Value for commercial weighs on the rents, then Class, then comparables which is different than residential. If this is a purchase you need a huge down payment, if a refinance then your valuation is way too high and won't appraise for $5,1
That's right, but also there are loans for the down payment. I think is better to start with a small investment, then go up.
Commercial is not going to allow a second trust deed loan. Any loan payment goes into the cash flow, rents are so low in your example - compared to the price it cannot work, it will only make it worse.
- Real Estate Broker · Los Angeles, CA · Member since 2013 · 9 posts · 4 votes3y
Quote from @Hawazin Alabbasi:
Quote from @Jerardo Linares:
@Richard Ruedas we do a lot of DSCR loans for our mortgage clients and its definitely a great strategy when you dont show too much income on paper. I used it for one of my joshua tree airbnbs, I bought it and fixed it up, then cashed out with a DSCR investor loan
Hi Jerardo,
Can the DSCR loan cover a multi-family loan of 12-22 units? How much is the DSCR limitation? Also, do you know any other loans that can cover 22 units regards of the price of the building if it has great cash flow?
@Hawazin Alabbasi DSCR goes up to 8 units, anything above that would be a commercial loan
- Los Angeles, CA · Member since 2023 · 16 posts · 0 votes3y
Quote from @Jack Martin:
All I am doing these days are DSCR loans; think of it as a stated income loan. You don't need tax returns or W-2's to show income. You just need rental income, (I can even use a rent survey if it is unleased). I can pair the DSCR with a 40 yr. interest-only loan to increase your cash flow.Hi Jack,
Can you please explain more about the rent survey? How did you design it? what questions are included and who did answer your questions?
- Los Angeles, CA · Member since 2023 · 16 posts · 0 votes3y
Quote from @Caroline Gerardo:
Quote from @Hawazin Alabbasi:
Quote from @Caroline Gerardo:
$3,825,000 loan amount PITI is $34900 monthly
Your monthly rents stated are $22,098 it does not cash flow at 75%
$2,295,000 probably maximum loan as PITI is $23000
Over 8 units is commercial. Loans are due in full in five or seven years. At the end of the five years you must refinance or sell. This is why many commercial office/retail/multifamily are in trouble- the rate is high and hard to cash flow. No I do not mean "you need to multiply cash flows..."
Value for commercial weighs on the rents, then Class, then comparables which is different than residential. If this is a purchase you need a huge down payment, if a refinance then your valuation is way too high and won't appraise for $5,1
That's right, but also there are loans for the down payment. I think is better to start with a small investment, then go up.
Commercial is not going to allow a second trust deed loan. Any loan payment goes into the cash flow, rents are so low in your example - compared to the price it cannot work, it will only make it worse.
If you go and check my example above you will see the rent is very little, this property is here in Los Angeles. However, my question is can the seller lie regards the rent amount? if yes why? if not, why the rent is very low?
- Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes3y
Market rents are ALWAYS verified but two outside sources: appraiser and underwriter. The property class must be C or D Which means constant problems. Are you ready to sleep there three times a year?
There are NO loans for down payment for commercial. Over 4 units is commercial. Over 2 units you need larger down payment
- Lender · San Clemente, CA · Member since 2017 · 77 posts · 35 votes3y
Quote from @Hawazin Alabbasi:
Quote from @Jack Martin:
All I am doing these days are DSCR loans; think of it as a stated income loan. You don't need tax returns or W-2's to show income. You just need rental income, (I can even use a rent survey if it is unleased). I can pair the DSCR with a 40 yr. interest-only loan to increase your cash flow.Hi Jack,
Can you please explain more about the rent survey? How did you design it? what questions are included and who did answer your questions?
Sure! A rent survey is supplied by the appraiser who gathers rental details for comparable properties as the subject property, much like comparable sales. Lenders can use the rent survey in lieu of lease agreements. This works in case the subject property is in mid-rehab.
- Los Angeles, CA · Member since 2023 · 16 posts · 0 votes3y
Quote from @Jack Martin:
Quote from @Hawazin Alabbasi:
Quote from @Jack Martin:
All I am doing these days are DSCR loans; think of it as a stated income loan. You don't need tax returns or W-2's to show income. You just need rental income, (I can even use a rent survey if it is unleased). I can pair the DSCR with a 40 yr. interest-only loan to increase your cash flow.Hi Jack,
Can you please explain more about the rent survey? How did you design it? what questions are included and who did answer your questions?
Sure! A rent survey is supplied by the appraiser who gathers rental details for comparable properties as the subject property, much like comparable sales. Lenders can use the rent survey in lieu of lease agreements. This works in case the subject property is in mid-rehab.
Great! Love this!
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