DSCR LOAN question
Investor · Poulsbo, WA · Member since 2023 · 21 posts · 15 votes
DSCR LOAN question
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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votesQuote from @Daniel Gugliotti:
This thread is super helpful, thanks Shaydon for asking the question! I am in a similar scenario, but I also do not have a current home to sell. I am looking to so a rehab loan (which I have heard also be called a bridge loan). I was under the impression the bridge loan could be your down payment until you can close on the DSCR/conventional mortgage and then the cash refi makes the lender whole on the bridge loan. But it sounds like with the rehab loan, I am still coming up with 25-ish% as DP for this loan, correct? Thanks all!
Daniel - it would still be two separate loans - one for the purchase/rehab and then a separate DSCR Loan for the Refinance. You can probably secure the hard money with less than a 25% down payment, and then if things go right - 0 out of pocket on the refinance, but you will still need at least some "skin in the game" regarding a little equity/down payment to start.
Sharing this article published here on BP last year on this topic - hope it can help too!
https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...
Harpoon Capital514 Reviews
12 Replies
- 2yJason WrayPro MemberBanker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
Shaydon,
DSCR only requires 15% down for a SFR purchase but there is no way to use the equity in a purchase scenario. The equity can only be used in a refinance situation and you are not on title so you cannot refinance the home. You still have a few options in terms of acquiring the home.
If you own a primary home you could do a cash out refinance pay off or down all of your debts. If there is enough cash/equity it might cover the 15% down payment and debt payoffs. If you can refinance and just pay off debts you can take out a personal loan after the refinance up to $50K. That could be used to put down the 15% down on the new purchase using DSCR.
You could also do a "subject to" contract if you want more info I would look up "Pace Morby's" info or videos on Ytube. You might be able to find a happy middle ground with your neighbor until you can find the 15% to buy the home.
- Investor · Poulsbo, WA · Member since 2023 · 21 posts · 15 votes2y
Thank you for the reply. I have no debt other than my mortgage on my primary and a mortgage on my 1 rental. My primary has 0 equity because I just bought it last summer. The rental has quite a bit but it's at a 2.875% rate that I wouldnt trade for this deal. What about doing a bridge loan for the initial purchase? Make some cosmetic repairs and then straight into DSCR? I imagine I would be close to 75% LTV after light repairs. Would a down payment be required during the transition from the Bridge loan into DSCR? Is that considered a refinance by the banks? Sub 2 won't work. Wells Fargo wants the 70K from his mortgage deferment during covid which is the reason he is in this mess.
- 2yJason WrayPro MemberBanker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
Quote from @Shaydon Childers:
Thank you for the reply. I have no debt other than my mortgage on my primary and a mortgage on my 1 rental. My primary has 0 equity because I just bought it last summer. The rental has quite a bit but it's at a 2.875% rate that I wouldnt trade for this deal. What about doing a bridge loan for the initial purchase? Make some cosmetic repairs and then straight into DSCR? I imagine I would be close to 75% LTV after light repairs. Would a down payment be required during the transition from the Bridge loan into DSCR? Is that considered a refinance by the banks? Sub 2 won't work. Wells Fargo wants the 70K from his mortgage deferment during covid which is the reason he is in this mess.
A bridge loan means you have a home currently listed for sale on MLS and while you wait for it to sell another bank offers you the cash based on your mortgage payoff and profit. So unless you have home you want to sell or use for the equity you cannot do a bridge loan. You cannot do a bridge loan on the actual property you want to buy because that would be a refinance.
On a renovation loan you still need to have a down payment to cover the LTV/LTC gap since most banks only allow a 80% LTC on a investment SFR.
What you can do is take out a HELOC on your investment rental so that you do not touch the 2.875%. Those sit in 2nd lien position like a 2nd mortgage or again a personal loan for the 15% down payment (no lien or property required).
If you want to talk about this in detail I can offer some clarity just reach out or message me I am always happy to help.
- 2yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Shaydon Childers:
I am looking at an off market deal to help a neighbor and make a long term investment. My neighbor needs to sell and doesn't want to move. I wanted to propose he sell to me at a 20% discount and I would lease it back to him for an extended period of time.
Home Value 510K
Purchase 400K
How can I leverage the instant equity instead of making a down payment? I was told I need 15-20% down for a DSCR even with the discounted price. If you buy with another loan type could you refinance into a DSCR at 80% LTV and not have to make a down payment? If someone can tell me how to do this deal with less that 20K out of pocket I would appreciate the help. Loan assumption isn't an option here. My DTI is maxed out too. The lease he signs if done will meet the debt service on the loan or I wont make the deal.
DSCR isn't going to work with a nons-arm length transaction or any type of financing/lien on the down payment
Harpoon Capital514 Reviews - Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes2y
Leasing back to him excludes doing a conventional loan. Underwriter is going to say not an arms length transaction. Also 99% of DSCR lenders will say no due to the special dealing.
Close with hard money. You can't qualify for a HELOC on the rental due to DTI? Ask the hard money to cross over the rental and this property which is sticky and messy as they may force you to sell both if things go badly. You need a hard money guy who knows you as they will say you have no skin in the game.
The rents that the seller pays (discounted) are going to trip up trying to refinance out of hard money as any lender will use the lower amount to qualify thus cutting your loan down to be able to make the rents cover PITI. This is a only a short term hold for 18 months and sell because of the structure.
Quote from @Shaydon Childers:
I am looking at an off market deal to help a neighbor and make a long term investment. My neighbor needs to sell and doesn't want to move. I wanted to propose he sell to me at a 20% discount and I would lease it back to him for an extended period of time.
Home Value 510K
Purchase 400K
How can I leverage the instant equity instead of making a down payment? I was told I need 15-20% down for a DSCR even with the discounted price. If you buy with another loan type could you refinance into a DSCR at 80% LTV and not have to make a down payment? If someone can tell me how to do this deal with less that 20K out of pocket I would appreciate the help. Loan assumption isn't an option here. My DTI is maxed out too. The lease he signs if done will meet the debt service on the loan or I wont make the deal.
@Shaydon Childers We do have a program that we will get an appraisal of the property as-is and lend 75% of that appraised value for well qualified borrowers. So to use your numbers we would lend 75% of the 510k which is 382,500. You would come up with the difference plus closing costs which of course is much lower then 20% of 400k plus closing costs.
We lend our own money so we can do this where other secondary market loans will require you to use the lower of the appraisal value or sales price for the down payment calculation.
Hurst Real Estate, INC4.991 Reviews- 12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes2y
He can seller finance it to you
- 2ySasha MohammedPro MemberLender · Costa Mesa, CA · Member since 2018 · 337 posts · 245 votes
most responses are right, this will be challenging for traditional DSCR as they dont like gift of equity; and seller credits would be capped (usually at 2% of your purch price) and only allowable to be applied to closing costs.
i have one lender (specifically for 1-4 unit investment properties) which will allow for up-to 90% CLTV... and they are okay with seller financing so long as the seller is in 2nd lien position, allowing them in first lien position. they would max at 75% LTV on their 1st, with a 15% allowable seller-carryback (90% CLTV), and then up to 3% seller credits toward closing costs too.
they offer 30 year fixed rates, however, due to the added risk for the lender, the rates are going to be much higher than the traditional DSCR loan. BUT if it gets your deal done with less cash out of pocket, might be worth considering a higher rate until you can build some more equity/ pay down some of the balance, and the refi into something more reasonable in terms of rates. I believe they start in the high 9's currently.
you wont get to your $20k out of pocket target on this scenario specifically, but the point is, there are some lenders which will work with out of the box deal structure (for a premium).
Quote from @Sasha Mohammed:
most responses are right, this will be challenging for traditional DSCR as they dont like gift of equity; and seller credits would be capped (usually at 2% of your purch price) and only allowable to be applied to closing costs.
i have one lender (specifically for 1-4 unit investment properties) which will allow for up-to 90% CLTV... and they are okay with seller financing so long as the seller is in 2nd lien position, allowing them in first lien position. they would max at 75% LTV on their 1st, with a 15% allowable seller-carryback (90% CLTV), and then up to 3% seller credits toward closing costs too.
they offer 30 year fixed rates, however, due to the added risk for the lender, the rates are going to be much higher than the traditional DSCR loan. BUT if it gets your deal done with less cash out of pocket, might be worth considering a higher rate until you can build some more equity/ pay down some of the balance, and the refi into something more reasonable in terms of rates. I believe they start in the high 9's currently.
you wont get to your $20k out of pocket target on this scenario specifically, but the point is, there are some lenders which will work with out of the box deal structure (for a premium).
Hi @Sasha Mohammed, could you direct message me the lender that can do this? I have a borrower that I've been trying to take care of in Missouri for a few weeks now and this could be the answer I've been looking for!
- Member since 2024 · 16 posts · 7 votes2y
This thread is super helpful, thanks Shaydon for asking the question! I am in a similar scenario, but I also do not have a current home to sell. I am looking to so a rehab loan (which I have heard also be called a bridge loan). I was under the impression the bridge loan could be your down payment until you can close on the DSCR/conventional mortgage and then the cash refi makes the lender whole on the bridge loan. But it sounds like with the rehab loan, I am still coming up with 25-ish% as DP for this loan, correct? Thanks all!
- 2yRobin SimonBusiness MemberLender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
Quote from @Daniel Gugliotti:
This thread is super helpful, thanks Shaydon for asking the question! I am in a similar scenario, but I also do not have a current home to sell. I am looking to so a rehab loan (which I have heard also be called a bridge loan). I was under the impression the bridge loan could be your down payment until you can close on the DSCR/conventional mortgage and then the cash refi makes the lender whole on the bridge loan. But it sounds like with the rehab loan, I am still coming up with 25-ish% as DP for this loan, correct? Thanks all!
Daniel - it would still be two separate loans - one for the purchase/rehab and then a separate DSCR Loan for the Refinance. You can probably secure the hard money with less than a 25% down payment, and then if things go right - 0 out of pocket on the refinance, but you will still need at least some "skin in the game" regarding a little equity/down payment to start.
Sharing this article published here on BP last year on this topic - hope it can help too!
https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...
Harpoon Capital514 Reviews - 2yJason WrayPro MemberBanker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
Quote from @Daniel Gugliotti:
This thread is super helpful, thanks Shaydon for asking the question! I am in a similar scenario, but I also do not have a current home to sell. I am looking to so a rehab loan (which I have heard also be called a bridge loan). I was under the impression the bridge loan could be your down payment until you can close on the DSCR/conventional mortgage and then the cash refi makes the lender whole on the bridge loan. But it sounds like with the rehab loan, I am still coming up with 25-ish% as DP for this loan, correct? Thanks all!
Daniel,
Just to clear up a few things if you need to go the DSCR route you only need 15% down if its a 1-2 unit. If you use a Portfolio loan program you only need to put 15% down even up to 4 unit multifamily. A bridge loan is when you can borrower money up to 80% LTV on any home while its listed on MLS for sale. You can use that money to put down on any new purchase the bridge loan is set up as an interest only loan for up to 18 months.
You can also use a simple "Renovation Loan" to purchase a home or after you close but the renovations must fit into the new ARV/LTV. DSCR uses the rents of the property to qualify you do not need to show personal or business income – it's great for self-employed, Retired, Fixed Income, New business owner, Realtors, or simply No job at all!
Biggest thing about DSCR to remember is know your "rents" up front because 99% of banks/lenders use the "lesser of the Two" rule. Meaning you must have an appraisal completed and the lender will look at the 1007/Rent schedule and use the lesser of the "Common rents" of the neighborhood or the current rents of the property.
DSCR qualifies off of a DSCR ratio in most cases or in order to get a good rate you need to make sure the rents are equal to or greater than the PITI or ITI payment. ITI is the interest, taxes and insurance versus principal taxes and insurance. Sometimes the I/O interest only option can lower the payment in a situation the rents or the common rents are low to help qualify.
Most common DSCR ratio is a 1.00% where the rents are equal to the PITI or ITI. If your ratio is 1.35% or higher it then goes into an "elite DSCR pricing - Not all lender offer this option. There is a lower ratio program of .80% in cases of low rents but the rates are higher usually in the 8.50 to 9.50% Be careful of your prepayment penalties as well it can lock you into a high rate or cost you money if you plan on refinancing in 12-24 months.
If you ever have any specific quetions feel free to reach out I am always happy to help and talk REI!
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