DSCR loans BRRR

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DSCR loans BRRR

Jordan Fujan
Member since 2023 · 10 posts · 10 votes

I've currently been shopping around banks for a DSCR loan on a BRRR. I've now had 4 banks get back and say they only offer up to 25 year amortization and 5 year rate terms. They can do around %8 on the loan. When i first started reading about DSCR i was under the impression they were still generally 30 year fixed loans.


Is 25 years and 5 year terms the current norm? Would you be reluctant to go with a 5 year term? 

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Robin SimonBusiness Member
Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
2y
Quote from @Jordan Fujan:

I've currently been shopping around banks for a DSCR loan on a BRRR. I've now had 4 banks get back and say they only offer up to 25 year amortization and 5 year rate terms. They can do around %8 on the loan. When i first started reading about DSCR i was under the impression they were still generally 30 year fixed loans.


Is 25 years and 5 year terms the current norm? Would you be reluctant to go with a 5 year term? 


I don't think you are looking at what is generally referred to as "DSCR Loans" if what you are getting quoted back are from banks and they are offering 5-year terms. What is commonly known as DSCR Loans are loans from private lenders, not typically banks, and these loans are part of the "Non-QM" umbrella and turned into mortgage-backed securities, not typically held on a bank's balance sheet.

Here are some articles published on BP that should help!

https://www.biggerpockets.com/blog/what-documents-do-you-nee...

What are DSCR Loans?

While there isn’t an exact, commonly agreed-upon definition out there, here is a handy definition for this specific loan product:

DSCR loans are mortgage loans secured by residential real estate turnkey properties, strictly used for a business purpose and underwritten primarily based on the property.

Important note: DSCR loans refer to the specific loan type, and the "DSCR ratio" (debt service coverage ratio) is a metric used for underwriting and evaluating these loans (and other loans), but the metric and ratio itself are distinct things versus what is referred to as “DSCR loans.”

Some key things to note in the definition:

  • DSCR loans are secured loans (meaning that there is collateral that the lender can take if the borrower doesn't pay back the debt). They are also mortgage loans, i.e., secured loans for which the secured collateral is real estate.
  • DSCR loans cover residential real estate properties, not commercial real estate properties. So investment properties that are commercial in nature (think office buildings, retail strip centers, etc.) cannot use DSCR loans. They can be leveraged with commercial real estate loans that use the DSCR metric for evaluation; however, these are not under the "DSCR loan" product bucket.
  • DSCR loans are for "business purpose," only meaning that the owner of the property can not live in the property under any circumstances. These loans are strictly for investment properties where the property is owned and operated for business purpose and rented out for income. Additionally, for DSCR loans for which the purpose is a “cash-out refinance,” the use of the cash-out proceeds must also be used for a business purpose. Commonly, these proceeds are used for further real estate investment or costs related to the borrower’s real estate business and strictly can‘t be used for personal uses, such as paying off personal credit cards or any nonbusiness expense.
  • DSCR loans are "primarily based on the property," meaning that the lender evaluates and qualifies the deal mostly but not completely based on the property’s investment potential. This is a common misconception where people sometimes assume DSCR loans are purely based on the asset. DSCR lenders will run personal credit (which, along with LTV and DSCR, is among the three biggest factors determining your rate and terms) and typically require three to six months of PITIA “reserves” in liquid assets. The rest of the documentation and underwriting will be based on the asset, but it’s important to remember that qualification isn’t 100% based on the property. Your credit and some basic liquid assets matter, too.
  • Finally, DSCR loans are for "turnkey" properties only, meaning any property needing any significant renovations or rehab is not going to qualify, and you will likely need to explore hard money options instead.

https://www.biggerpockets.com/blog/dscr-loans-terms-to-know

And extremely relevant to your post: 

BRRRR Loans: What Are the Options, and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

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  • Nate HerndonPro Member
    Lender · Springfield, MO · Member since 2023 · 278 posts · 195 votes
    2y
    Quote from @Jordan Fujan:

    I've currently been shopping around banks for a DSCR loan on a BRRR. I've now had 4 banks get back and say they only offer up to 25 year amortization and 5 year rate terms. They can do around %8 on the loan. When i first started reading about DSCR i was under the impression they were still generally 30 year fixed loans.


    Is 25 years and 5 year terms the current norm? Would you be reluctant to go with a 5 year term? 


     Hi Jordan, good on you for searching around and doing your homework. I believe it is more common practice for your local bank’s commercial programs to only offer 5-year terms on 25 year ams. That’s what I see here in Missouri too.

    For the couple dozen national private lenders that I utilize for clients, they are all 30-year fixed terms. I don’t see a huge issue with a 5-year term right now as most folks are planning to refi in 2-5 years at a lower rate anyway. It’s really that the 25-year am constrains your DSCR more than a 30-year am.

    Local banks may also want to see a 1.15-1.25 minimum DSCR, whereas I am only using programs with a 1.00-1.10 DSCR floor. 

    [email protected]417-605-2196
    1Reply
  • Ko KashiwagiPro Member
    Lender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
    2y

    Hi Jordan,

    There are many lenders out there that can do 30 year fixed DSCR. Local banks are more tailored for conventional programs, so you may want to look into institutional companies that specializes in commercial financing.

    310-848-9776
    0Reply
  • Jordan Fujan
    OP
    Member since 2023 · 10 posts · 10 votes
    2y
    Quote from @Nate Herndon:
    Quote from @Jordan Fujan:

    I've currently been shopping around banks for a DSCR loan on a BRRR. I've now had 4 banks get back and say they only offer up to 25 year amortization and 5 year rate terms. They can do around %8 on the loan. When i first started reading about DSCR i was under the impression they were still generally 30 year fixed loans.


    Is 25 years and 5 year terms the current norm? Would you be reluctant to go with a 5 year term? 


     Hi Jordan, good on you for searching around and doing your homework. I believe it is more common practice for your local bank’s commercial programs to only offer 5-year terms on 25 year ams. That’s what I see here in Missouri too.

    For the couple dozen national private lenders that I utilize for clients, they are all 30-year fixed terms. I don’t see a huge issue with a 5-year term right now as most folks are planning to refi in 2-5 years at a lower rate anyway. It’s really that the 25-year am constrains your DSCR more than a 30-year am.

    Local banks may also want to see a 1.15-1.25 minimum DSCR, whereas I am only using programs with a 1.00-1.10 DSCR floor. 

    Thanks for the feedback. Can you tell me the names of the national private lenders that you find reputable?

    0Reply
  • Nate HerndonPro Member
    Lender · Springfield, MO · Member since 2023 · 278 posts · 195 votes
    2y

    Yeah, I’d be happy to connect and discuss. Will shoot you a quick message. 

    [email protected]417-605-2196
    0Reply
  • Devin PetersonBusiness Member
    Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 681 votes
    2y
    Quote from @Jordan Fujan:

    I've currently been shopping around banks for a DSCR loan on a BRRR. I've now had 4 banks get back and say they only offer up to 25 year amortization and 5 year rate terms. They can do around %8 on the loan. When i first started reading about DSCR i was under the impression they were still generally 30 year fixed loans.


    Is 25 years and 5 year terms the current norm? Would you be reluctant to go with a 5 year term? 


    There are still a large portion of wholesale DSCR lenders that will do a 30yr fixed DSCR no problem. 8% sounds pretty standard right about now. I would go with what produces the most cash flow at the end of the day.

    [email protected]860-538-3672
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    0Reply
  • Robin SimonBusiness Member
    Lender · Austin, TX · Member since 2022 · 5k+ posts · 4k+ votes
    2y
    Quote from @Jordan Fujan:

    I've currently been shopping around banks for a DSCR loan on a BRRR. I've now had 4 banks get back and say they only offer up to 25 year amortization and 5 year rate terms. They can do around %8 on the loan. When i first started reading about DSCR i was under the impression they were still generally 30 year fixed loans.


    Is 25 years and 5 year terms the current norm? Would you be reluctant to go with a 5 year term? 


    I don't think you are looking at what is generally referred to as "DSCR Loans" if what you are getting quoted back are from banks and they are offering 5-year terms. What is commonly known as DSCR Loans are loans from private lenders, not typically banks, and these loans are part of the "Non-QM" umbrella and turned into mortgage-backed securities, not typically held on a bank's balance sheet.

    Here are some articles published on BP that should help!

    https://www.biggerpockets.com/blog/what-documents-do-you-nee...

    What are DSCR Loans?

    While there isn’t an exact, commonly agreed-upon definition out there, here is a handy definition for this specific loan product:

    DSCR loans are mortgage loans secured by residential real estate turnkey properties, strictly used for a business purpose and underwritten primarily based on the property.

    Important note: DSCR loans refer to the specific loan type, and the "DSCR ratio" (debt service coverage ratio) is a metric used for underwriting and evaluating these loans (and other loans), but the metric and ratio itself are distinct things versus what is referred to as “DSCR loans.”

    Some key things to note in the definition:

    • DSCR loans are secured loans (meaning that there is collateral that the lender can take if the borrower doesn't pay back the debt). They are also mortgage loans, i.e., secured loans for which the secured collateral is real estate.
    • DSCR loans cover residential real estate properties, not commercial real estate properties. So investment properties that are commercial in nature (think office buildings, retail strip centers, etc.) cannot use DSCR loans. They can be leveraged with commercial real estate loans that use the DSCR metric for evaluation; however, these are not under the "DSCR loan" product bucket.
    • DSCR loans are for "business purpose," only meaning that the owner of the property can not live in the property under any circumstances. These loans are strictly for investment properties where the property is owned and operated for business purpose and rented out for income. Additionally, for DSCR loans for which the purpose is a “cash-out refinance,” the use of the cash-out proceeds must also be used for a business purpose. Commonly, these proceeds are used for further real estate investment or costs related to the borrower’s real estate business and strictly can‘t be used for personal uses, such as paying off personal credit cards or any nonbusiness expense.
    • DSCR loans are "primarily based on the property," meaning that the lender evaluates and qualifies the deal mostly but not completely based on the property’s investment potential. This is a common misconception where people sometimes assume DSCR loans are purely based on the asset. DSCR lenders will run personal credit (which, along with LTV and DSCR, is among the three biggest factors determining your rate and terms) and typically require three to six months of PITIA “reserves” in liquid assets. The rest of the documentation and underwriting will be based on the asset, but it’s important to remember that qualification isn’t 100% based on the property. Your credit and some basic liquid assets matter, too.
    • Finally, DSCR loans are for "turnkey" properties only, meaning any property needing any significant renovations or rehab is not going to qualify, and you will likely need to explore hard money options instead.

    https://www.biggerpockets.com/blog/dscr-loans-terms-to-know

    And extremely relevant to your post: 

    BRRRR Loans: What Are the Options, and How Do DSCR Loans Stack Up?

    https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

    [email protected]
    Harpoon Capital514 Reviews
    WebsiteView Page
    11Reply
  • Kristen L GarnerBusiness Member
    Lender · Phoenix, AZ · Member since 2021 · 451 posts · 287 votes
    2y

    There are many 30 year fixed amortization options! Feel free to DM me if you'd like me to dig into a few of them based on your scenario.

    [email protected]213-880-0434
    0Reply
  • River SavaPro Member
    Lender · USA · Member since 2022 · 1k+ posts · 1k+ votes
    2y

    Hey Jordan! 

    There are lenders that do 30 year fully amortizing loans. Shouldn't be hard to find one to help you out

    [email protected]
    1Reply
  • Stephanie P.Pro Member
    Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
    2y
    Quote from @Jordan Fujan:

    I've currently been shopping around banks for a DSCR loan on a BRRR. I've now had 4 banks get back and say they only offer up to 25 year amortization and 5 year rate terms. They can do around %8 on the loan. When i first started reading about DSCR i was under the impression they were still generally 30 year fixed loans.


    Is 25 years and 5 year terms the current norm? Would you be reluctant to go with a 5 year term? 


     Lots of brokers out there that will do 30 year fixed, but a lot depends on your situation.

    I can't recommend any bank for DSCR, especially if they're keeping you on a 25 year amortization. The cash flow will be terrible in almost every market in the country.

    1Reply
  • Stacy RaskinBusiness Member
    Lender · Member since 2022 · 1k+ posts · 529 votes
    2y

    There are lenders that will do fixed 30 year terms, fixed 40 year terms, 40 year term with 10 year interest only converting to 30 year fixed. 

    This is not a bank's speciality so they are going to be more conservative. You want to work with a mortgage broker or lender that specializes in products like DSCR loans as they have better guidelines such as lower DSCR ratios.

    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+ generally gets best pricing for investment property loans with most lenders

    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

    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.

    [email protected]818-770-0340
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    0Reply
  • Jordan Fujan
    OP
    Member since 2023 · 10 posts · 10 votes
    2y

    Thanks everyone for the feedback. The article  https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...   that @Robin Simon mentioned filled in a huge hole. I've read David Greene's BRRR book and as the article mentioned, it says nothing about DSCR in it.


    As for Conventional loans, from everything I've read on BP they're now a 12 month seasoning period. Two of the banks i contacted are insisting they can do 6 months seasoning on a conventional loan even after i questioned them on it. Are they just behind on info? Are they talking about a different loan option? 

    0Reply
  • Brayden Hrycko
    Lender · Allentown, PA · Member since 2023 · 207 posts · 38 votes
    2y

    Hey @Jordan Fujan,

    Most lenders on the wholesale side are offering 30 year fixed loans. You can pick your pre-payment penalty if they charge one. Depends on the state if they are allowed or not. I am typically seeing DSCR around the 7's right now. Depends on your scenario. I'd be happy to connect.

    0Reply
  • Austin ClarenceBusiness Member
    Lender · Phoenix, AZ · Member since 2023 · 136 posts · 32 votes
    2y

    Banks or credit unions often offer ARM programs and 25 year programs. But most DSCR options are typically 30 year fixed programs. You can try contacting

    [email protected]650-906-2376
    Austin Clarence with NEXA Mortgage553 Reviews
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  • Jacob Sherman
    12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes
    2y

    You are correct . They are generally 30 year loans . They are offering you 4 year arms 

    0Reply
  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    2y
    Quote from @Jordan Fujan:

    I've currently been shopping around banks for a DSCR loan on a BRRR. I've now had 4 banks get back and say they only offer up to 25 year amortization and 5 year rate terms. They can do around %8 on the loan. When i first started reading about DSCR i was under the impression they were still generally 30 year fixed loans.


    Is 25 years and 5 year terms the current norm? Would you be reluctant to go with a 5 year term? 

    30 year fixed DSCR loans are pretty standard nowadays.

    You may refinance with no seasoning period with a handful of DSCR lenders


    [email protected]818-269-7983
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  • River SavaPro Member
    Lender · USA · Member since 2022 · 1k+ posts · 1k+ votes
    2y

    Hey Jordan - Conventional lenders like banks will typically follow this structure which is not a true DSCR loan. Are you looking to stay conventional or non-conventional?

    Can be nuanced so I am happy to discuss further if interested. 

    [email protected]
    1Reply
  • Jake BakerBusiness Member
    Flipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 696 votes
    2y

    @Jordan Fujan

    I agree that there are many lenders out there that will do 30 year fixed. 

    [email protected]
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  • Jonathan Taylor
    Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
    2y

    @Jordan Fujan Banks will offer a commercial loan structure on DSCR style loans but nation wide business purpose lenders (not banks) are the ones who offer 30 yr fixed terms. You can work with a broker to price you out on 30 yr terms.

    0Reply
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