Refinance Strategy for Rental Property - Conventional Bank vs. DSCR

[Eduardo Cambil]

Hi BiggerPockets Community,

I'm looking for some advice on refinancing a rental property through a conventional bank and would love to tap into the collective experience here.

We currently own a single-family rental in Decatur, IL, which is occupied by a Section 8 tenant with a stable rent of $1,200/month. While we've used DSCR loans in the past for their simplicity, the underwriting can be a lengthy process, and we're exploring if a more traditional route with a conventional bank might be a better fit for this property.

Our Goal:
We want to pull equity out of this property via a cash-out refinance to fund a new acquisition. Ideally, we'd like to do this through a conventional bank, using the property's rental income to qualify.

Our Main Questions:

1. Is it possible for a conventional bank to approve a loan primarily based on the property's rental income, rather than our personal W-2 income? We operate through our LLC, C&T Global Solutions LLC.
2. What specific documentation would a "normal" bank require? I assume we'd need:
   • A solid lease agreement.
   • Proof of rental income (bank statements showing deposits).
   • What about tax returns? Would they need to see Schedule E from our personal returns, or would they consider the LLC's financials?
3. How do banks typically treat the income? Do they use 75% of the gross rent? Is there a minimum debt-service coverage ratio (DSCR) they look for, even on a single-family rental?
4. Does the fact that it's a Section 8 tenant with guaranteed income help or hinder the application in the eyes of a conventional underwriter?

Property Snapshot:

• Type: Single-Family Home
• Location: Decatur, IL
• Status: Rented
• Rent: $1,200/month (Section 8)

If anyone has successfully navigated a similar refinance with a local or national bank, I would be incredibly grateful for any insights. What was your experience? Which banks are known to be more rental-property-friendly for investors?

Thanks in advance for sharing your knowledge!

Eduardo Cambil

[Erik Estrada]

Quote from @Eduardo Cambil:

Hi BiggerPockets Community,

I'm looking for some advice on refinancing a rental property through a conventional bank and would love to tap into the collective experience here.

We currently own a single-family rental in Decatur, IL, which is occupied by a Section 8 tenant with a stable rent of $1,200/month. While we've used DSCR loans in the past for their simplicity, the underwriting can be a lengthy process, and we're exploring if a more traditional route with a conventional bank might be a better fit for this property.

Our Goal:
We want to pull equity out of this property via a cash-out refinance to fund a new acquisition. Ideally, we'd like to do this through a conventional bank, using the property's rental income to qualify.

Our Main Questions:

1. Is it possible for a conventional bank to approve a loan primarily based on the property's rental income, rather than our personal W-2 income? We operate through our LLC, C&T Global Solutions LLC.
2. What specific documentation would a "normal" bank require? I assume we'd need:
   • A solid lease agreement.
   • Proof of rental income (bank statements showing deposits).
   • What about tax returns? Would they need to see Schedule E from our personal returns, or would they consider the LLC's financials?
3. How do banks typically treat the income? Do they use 75% of the gross rent? Is there a minimum debt-service coverage ratio (DSCR) they look for, even on a single-family rental?
4. Does the fact that it's a Section 8 tenant with guaranteed income help or hinder the application in the eyes of a conventional underwriter?

Property Snapshot:

• Type: Single-Family Home
• Location: Decatur, IL
• Status: Rented
• Rent: $1,200/month (Section 8)

If anyone has successfully navigated a similar refinance with a local or national bank, I would be incredibly grateful for any insights. What was your experience? Which banks are known to be more rental-property-friendly for investors?

Thanks in advance for sharing your knowledge!

Eduardo Cambil

 Hey Eduardo, 

DSCR loans are actually the easiest underwriting process compared to a conventional mortgage. It might be that your lender is not experienced in navigating the conditions. The rates are also very similar to a conventional mortgage.

A conventional lender will want to verify your income for the past 2 years. If you are W-2 earner you will need to provide your 2023, 2024 W2s. If you are self employed, you will need to provide your last 2 years of business and personal tax returns. If you own multiple rentals, lenders will want to see your schedule Es for the last 2 years as well. It is actually a harder process to qualify conventionally if you are a full-time RE investor, as many investors have several mortgages, do a lot of tax write offs. It is not impossible, but there will be a lot more underwriting scrutiny when it comes to proving income as compared to a DSCR loan.