Down Payment Assistance included in DSCR?

Question

Hi,

I am putting together a multi-family deal. I am planning  to have part or all of the down payment provided by a private investor,  which I will pay interest to, and refinance after a few years, once I  add value, and then payoff the investor in full.

My question, is  assuming a bank allows a borrowed down payment (I found some that do,  and some that don't), should I expect them to include the down payment  in the DSCR, since it's borrowed?

This would be a commercial real estate loan.

Albert Bui · Answer

Yes Chris, if the borrower or DPA (down payment assistance) as you call it comes in as a lender in 2nd position behind your banks 1st lien then that debt service or mortgage payment will be factored into the DSCR.

If you structure it as a equity and you're both members/managers of a LLC then no because thats equity.

One method is debt like you mentioned and another is debt capital.

Most regional and national outfits will not allow a 2nd position upon acquisition or purchase.

In my experience its only been community banks or credit unions that have allowed 2nd position liens upon acquisition.

Christopher B. · Answer

Thanks.  so if I add the private money lender as a partner following the equity route, but keep them at less than 20% ownership, then the bank won't look to them as a Personal Guarantor? Can I still pay based solely on Interest, not a financial gain/loss from proceeds of the property, like from cash flow?

Chris Ellis · Answer

If you are going through a traditional bank and someone else brings the down payment money, they will want that person to sign off on the loan as well.

The reference was in regards to private money and not banks. A bridge loan will be structured as interest only with a balloon payment at the end. A longer term loan of 25 to 30 years will cover interest and the principle in payments.

Cash flow shows the ability to pay back a loan. A lender only charges interest. An investor is a different game in which they will take pieces of the pie.

Christopher B. · Answer

Hi @Chris Ellis , so if I add the private money lender to the Partnership, but keep them at less than 20% ownership, then the bank won't look to them as a Personal Guarantor?  I assume my written agreement with the private lender could still be payment based solely on Interest, not a financial gain/loss from proceeds of the property, like from cash flow?

Chris Ellis · Answer

The other side note for a traditional bank is that if the money is "borrowed" as a investor brings it to the table, they will also want that investor to sign off as a personal guarantor and also look at their income. From a bank perspective, yes it is certainly going to be added to the DSCR.

The way I see these types of deals getting done is through private money. The money is also not necessarily declared as debt. It must be seasoned for 30 to 60 days or they will be looking to source it. Keep them as less than 20% owner on the LLC formed to purchase property. If it is sourced the partnership can be explained and you are also working with more lenient sources than a traditional bank.

Down Payment Assistance included in DSCR?

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