Seller Financed Home - looking to do DSCR loan or is there something better?

Question

Hi guys, I purchased a home with seller financing last year and did some renovations. It will be going up for rent this week. I have about $120k left on seller financed loan and the house is worth $280k. What's my best way to get cash out of the house?

Tanner Lewis · Answer

It looks like DSCR would be the best option if you recently renovated it and have it rented out/about to be rented. Conventional would work too, but you would have to wait at least a year on seasoning, DSCR is only 6 months. Happy to connect if you want to look at it as DSCR

Stacy Raskin · Answer

DSCR seasoning varies by lender. There is DSCR seasoning that it as little as three months if you have an LLC and you would like to use the new appraised value. Lender options vary by state.

More info on DSCR loans: DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Drew Sygit · Answer

@Majdi Chowdhury is this a trick question?

Your only way to get cashout is a full-blown cashout refinance.

Not aware of a lender that will do a HELOC as a junior lien to seller-financing.

Robin Simon · Answer

Is the property in Michigan? Generally there is consensus that DSCR Lenders can only offer a 1% prepayment penalty for up to 3 years in MI, but some lenders have recently reportedly been flaunting this rule - I would just tread carefully here in this area, generally not advisable to get potentially tangled up in a flawed legal doc with a non-sophisticated or fly by night lender

Erik Estrada · Answer

Happy to connect

Majdi Chowdhury · Answer

are there any DSCR recommendations from this group?

Erik Estrada · Answer

Oh got it!

You should be able to refinance with any regular DSCR loan in this case. Have you tried going conventional yet?

Daniel Baccarini II · Answer

You can definitely do a DSCR loan for this situation. Even if there isn't a lease in place, underwriting can use market rents from an appraisal to qualify. Depending on the cash flow for the property, you are looking at up to 75% of the appraised value.

Majdi Chowdhury · Answer

seller is not on title. purchased dec 2023.

Seller Financed Home - looking to do DSCR loan or is there something better?

Seller Financed Home - looking to do DSCR loan or is there something better?

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