What Counts as a Credit Event for DSCR Loan Qualification?

[Robin Simon]

🤔 What Counts as a Credit Event for DSCR Loan Qualification?
➡️ There are generally four types of credit events taken into account for DSCR Loan qualification. First are Foreclosures (typically abbreviated as “FC”), which refer to the legal process by which a lender repossesses a property owned by the sponsor after a full loan default. A DSCR Lender will consider a foreclosure to have occurred, and thus consider it an applicable credit event, if the full legal foreclosure process were completed, including an actual lender repossession of a property through legal action. This is an important distinction because, the second and third types of credit events, Short Sales (typically abbreviated as “SS”) and Deed-In-Lieus (typically abbreviated as “DIL”) are generally results of the foreclosure process, in which an alternative solution to a full legal foreclosure was found.

Short Sales occur when there is a sale of a property for less than the outstanding mortgage balance, usually approved by a lender as an alternative to foreclosure. A Deed-in-Lieu of Foreclosure (DIL) is when a borrower voluntarily transfers the deed to the lender to avoid foreclosure (thus shortening the process). Both short sales and deed-in-lieu events are also treated as significant credit events by DSCR Lenders because they are essentially indicating the same thing as a fully completed foreclosure in an investor’s credit history.

Finally, the fourth type of event considered a credit event by DSCR Lenders is a recent investor bankruptcy. Bankruptcies are legal filings to discharge or reorganize personal debt which can include mortgage loans but also may not, depending on the individual. Each of Chapter 7, Chapter 11 and Chapter 13 bankruptcies are also considered credit events for DSCR Loan qualification, however different bankruptcy types are typically treated differently in terms of DSCR Loan eligibility and underwriting.

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