What I look at before submitting a DSCR deal

Question

When reviewing a DSCR deal, I like to have a few numbers figured out before getting into the loan structure:
Market rent

Property taxes and insurance

Expected vacancy
Management and maintenance

Purchase price and loan amount
Estimated monthly debt service

DSCR after operating expenses

I also like to run the numbers with a little room for changes in rent or expenses rather than relying on the most favorable assumptions.

Having those numbers organized makes it much easier to compare different loan structures and see how the financing affects the overall deal.

Gregory Acs · Answer

I think the stress test is just as important as the initial numbers. If a deal only works with optimistic rent projections or every expense coming in exactly as expected, it's probably worth taking another look. Conservative underwriting usually pays off over the long run.

Mike Klarman · Answer

For DSCR it is all about your loan amount, credit, the corresponding rate chart, the corresponding piti payment and the market rent.  If those dominoes line up, slam dunk deal.  I just closed an easy refi loan with what I think is best DSCR lender in the biz.  3 weeks but came in with appraisal.  Fast process.  Their rates leave plenty of room for origination and yield spread.  I made 7500 commission on a 300k loan size and client only saw one point origination on HUD.

If you can do one DSCR loan each month, that's only 12 loans, but if you could do one per month and you knew how to structure them, you can make 5k - 6k each month just on those 12.

Andrew Lee · Answer

As others have mentioned, not just CFPB, but also look at the USDA property eligibility tool.

Jeff Cichocki · Answer

Ali, I’d separate two questions that often get blended together:

Will this loan qualify under a particular lender’s DSCR guidelines?

Is this actually a good rental for the investor?

A property can qualify for financing and still be a weak investment. A good rental can also fail to fit a particular program. One ratio doesn’t answer both questions, and lenders don’t all define or treat every input the same way.

On the qualification side, I’d confirm the exact rent source the lender will use, every component included in the debt service, property type, rural or market restrictions, lease and seasoning treatment, borrower profile, liquidity, and reserves under the current guidelines.

Then I’d underwrite the property separately using the true all-in basis, supportable rent, vacancy, management even if the borrower plans to self-manage, repairs, capital expenditures, utilities, taxes, insurance, and a real reserve.

Finally, run the failure branch. What happens if rent is lower, taxes or insurance increase, a unit sits vacant, a major repair shows up, or the planned refinance isn’t available? Does the investor have enough liquidity to carry the property without the entire plan changing?

That separation prevents a loan that technically qualifies from being mistaken for a property that actually works.

Jesus Suarez · Answer

Building in that extra buffer for rent drops, tax reassessments, or insurance spikes is what separates a smooth closing from a dead deal.

I always tell borrowers that if a DSCR deal only works when every assumption is perfect, it isn't actually a good deal. Stress-testing those numbers early lets us structure the debt properly—adjusting LTV or rate buy-downs—before they drop money on appraisals. Always great to see another lender preaching conservative underwriting up front!

Kenneth Garrett · Answer

I’ve been a BRRRR investor for years and use private money for the initial purchase and refi using a DSCR loan.  So when deciding on whether I’ll pull the trigger on a deal I will look at the potential of a deal.  Here is what I look at:

1. What the ARV will be - Take your purchase price plus rehab.  Rehab includes cost of money plus, utilities, insurance and property taxes.

2. Projected Rents - Since I will BRRRR this deal it will be rented prior to refinancing.  I look at market rents, but the reality is I want to know how much I can push this.  I’ve been lately doing mostly MTR deals so the rents are higher than LTR, even though I make sure it cash flows as an LTR.  Some lenders will take my actual rent on my MTR lease while others fall back to market rent.  Not sure why the distinction other than the MTR space is newer.

3. Ratio of 1.25 at a minimum.  The higher the ratio, the better the deal.  I still need it to cash flow as that pays the bills and I let appreciation do its thing, but appreciation is not part of the calculation.  That’s the bonus.

4. I self manage, but I’ll throw the cost of management into my numbers.  Maintenance and any CapEx should be very low, but I will put in some maintenance dollars because things break down no matter how well you update things.  Under $1000 a year.

5. In the end, be realistic with your ARV.  I run comps for the appraiser with a list of repairs conducted and rehab cost.  They can use or throw it in the garbage, but I think it helps with the numbers.  Just refinanced a deal last week, appraisal came in $10K higher than I projected.  I provided the appraiser with my info and he said you know I can’t use these.  I said that’s fine, but it tells you what I did to the property and how much.  Most of the information ended up on the appraisal.

Good list of items to consider by @Ali Najjar.

Erik Estrada · Answer

Yes this is pretty solid. I would also check the CFPB website to confirm if the property is rural, get a title property report to make sure there is no Lis Pendens/Tax Liens, do an AVM to confirm the values are correct, and check liquidity/credit beforehand.

Doing the extra legwork helps tremendously and your borrower's will appreciate it. At least the ones that like hearing the truth and not what they would like to hear...

Ryan McPartland · Answer

@Erik Estrada great point regarding the CFPB rural check - very often missed, which can lead to late stage surprises after the borrower has paid $700-$800 for an appraisal and possibly has EMD at risk if the transaction is a purchase. Most DSCR lenders shy away from rural entirely and those that do entertain them, often times have additional risk overlays, e.g., LTV reductions, which can be a nasty surprise when you thought you need to put $X down and it's now $X + an additional 5% of the purchase price or value.

What I look at before submitting a DSCR deal

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