Anyone Actually Using These 40-Year DSCR Loans?

Question

I’ve been looking at these newer 40-year DSCR loans — 10 years interest-only, then 30-year amortization  &  I’m curious about what other investors think.

On a smaller SFR loan,  the savings are definitely not compelling enough to give up 10 years of principal paydown. But on a larger loan, a value-add deal, or across a growing portfolio, I can see the argument for keeping more cash available.  It also seems interesting for an improve/stabilize/divest strategy where amortization isn’t really where you’re expecting to create the value anyway.

My question: Who is actually using these, and what’s your strategy behind choosing interest-only? Portfolio growth? Better DSCR? Value-add? Or are you sticking with traditional amortization?  I'd love to hear from some lenders as well as investors - especially anyone who has used one or is entertaining using one  -

Joseph Cacciapaglia · Answer

I haven't used one yet, but I plan to going forward. One issue I've had with my portfolio over the years is getting into situations where I have trapped or "lazy" equity in properties. I've accumulated a lot of equity, to the point where my ROE is very low, but a cash out refinance doesn't make sense due to the lower legacy interest rate. A long I/O period should prevent this a bit. It won't completely eliminate it, because appreciation creates more equity than debt paydown in the long run, but it should help.

Robin Simon · Answer

I think its a gimmick - no difference than the standard Partial IO (10 year IO) on a 30-year loan, nobody keeps these past 10 years before selling/refinancing anyways

Joseph Cacciapaglia · Answer

Yes. I have at least a couple that make you qualify based on the amortized payment, not the IO payment. It just just a couple though, out of 25+ DSCR providers that I'm familiar with.

Andrew Caranto · Answer

On a small SFR, ten years of interest-only is a small payment cut for a lot of lost paydown. I'd only use it when the return is the value-add or the sale, and the exit date is on paper before year 10.

If the interest-only is what makes DSCR print, the purchase is the problem.

Robin Simon · Answer

Really? (confirming you are talking about the traditional 30 year partial IO option) - I don't think I've ever come across a DSCR Lender that qualifies the DSCR on the amortizing pmt on a partial IO loan

Joseph Cacciapaglia · Answer

Many (certainly not all) of the DSCR sources I work with are looking at the amortized payment for qualifying purposes, not just the IO payment. There are so many out there right now, and they're all doing different things, which is why I felt the need to qualify my statement with "depending on which lender..."

Robin Simon · Answer

Isn't the qualifying payment the same as a normal IO (30-year, 10-year IO) though?  Aren't both just qualifying on the IO pmt DSCR ratio?

Alicia Sierra · Answer

What would be your minimum loan amount that you would consider using this tool?

Joseph Cacciapaglia · Answer

At 75% LTV (which I prefer), I'm around $150K in loan amount on most single family deals in my market. I don't really think the deal size matters too much, because the math is about the same on a percentage basis.

Anyone Actually Using These 40-Year DSCR Loans?

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