How does your lender treat HOA dues in the DSCR? A four-condo package example

Question

Ran the numbers on a four-condo package recently and it turned into a clean example of how much one line item can move a DSCR. Curious how the lenders and landlords here handle it.

The package: four individually deeded units in the same complex, offered together at $345,000. Three occupied, one three-bedroom vacant.

Rents are $1,000, $1,100 and $1,300 on the occupied units, with a market estimate of $1,450 on the vacant three-bedroom. So $3,400 today and $4,850 stabilized.

HOA dues across the four units: $1,400 a month. That is 29% of stabilized rent. Add property taxes and roughly $2,100 a month of fixed cost sits ahead of the mortgage, about 43% of the rent. Annually that is $25,200 of fixed expense against $58,200 of gross rent.

Most residential DSCR programs put HOA dues inside PITIA. On a 25% down, 30-year illustration at 7.50%, that makes the qualifying payment $4,209 a month instead of the $1,809 of principal and interest.

What that does to coverage:

Current occupancy at $3,400 rent = 0.81, an $809 monthly shortfall

Stabilized at $4,850 = 1.15

Rent needed for a 1.20 = $5,051

Rent needed for a 1.25 = $5,261

To clear a 1.20 the vacant three-bedroom would have to produce about $1,651 against a $1,450 market estimate. Roughly $200 a month of rent decides whether the file exists.

More down payment barely moves it. 20% down reads 1.12, 25% reads 1.15, 30% reads 1.19.

Run it as a traditional NOI statement instead, stabilized rent less dues, taxes, insurance, 5% vacancy and 5% maintenance, and NOI is $23,580 against $21,708 of annual principal and interest. That is 1.09 before management. Add a property manager and it goes under 1.00.

Two questions for the group:

1. Does the lender you use put HOA dues inside PITIA or below the line? On a package like this it changes your maximum purchase price more than a quarter point of rate does.

2. On condo packages specifically, what DSCR floor are you actually being quoted right now, and does it change for four individual loans versus one blanket portfolio loan?

And for anyone shopping condos: pull the HOA budget, reserves, delinquency rate and any pending special assessment before you go hard. Dues rise on their schedule, not yours, and there is no way to raise rent to match mid-lease.

Door count is not cash flow. Interested to hear how others are underwriting these.

Steve Waller · Answer

Christian, agree on HOA sitting inside PITIA. On a condo file the dues are the deal, not a footnote. And you're right that the rent side is where two lenders give two answers to the same file.

The piece I'd add sits upstream of both: the project itself. Before anyone argues about the 1007 on the vacant unit, the condo questionnaire has to come back clean: investor concentration, pending litigation, reserve funding, and how many units one owner holds. Four units in one project is exactly the profile that trips a single-owner concentration limit, and that kills the file before the ratio is ever run.

Of the investors you place with, how many will take four units in one project, and where does the concentration cap usually land?

Christian Turner · Answer

Broker here, and I place DSCR files with a couple dozen investors, so here is what the spread actually looks like on your two questions.

• HOA inside PITIA: every DSCR investor I work with puts it inside. That is what the A in PITIA is. I have never seen a residential DSCR program treat dues below the line, and the couple of times a borrower thought they'd found one, it was a commercial or bank portfolio product underwriting on NOI, which is a different animal with a different rate and term. So on a condo package the dues are not a nuance, they are the deal.

HOA inside PITIA: every DSCR investor I work with puts it inside. That is what the A in PITIA is. I have never seen a residential DSCR program treat dues below the line, and the couple of times a borrower thought they'd found one, it was a commercial or bank portfolio product underwriting on NOI, which is a different animal with a different rate and term. So on a condo package the dues are not a nuance, they are the deal.

Where lenders do differ, and where the $200 a month you identified gets found or lost, is the rent side: whether the vacant three-bedroom gets 100% of the appraiser's 1007 market rent or a haircut; whether the occupied units are counted at the lease amount or the lower of lease and market (most say lower-of, a few will use market if the lease is under market and documented as a long-standing tenant); and whether they'll count the vacant unit at all without a signed lease in hand at closing. On your example, a lender that takes the 1007 at face value and a lender that requires a lease for vacant units produce two different answers to 'does this file exist.'

• Floors and structure: on condos most investors are quoting a 1.00 floor with the usual 75 to 80% LTV on a purchase, some go down to 0.75 with a rate and LTV hit, and a couple of no-ratio programs exist at lower leverage. Four individual loans versus one blanket: the blanket lets the package cover as a whole, so the vacant unit does not sink its own file, and it is one closing and one set of fees. The trade-offs are higher minimum loan amounts, partial-release provisions that cost you if you ever want to sell one unit, and the same 1.20-ish floor many portfolio lenders want on a blanket. On a $345k package the blanket is often too small for the portfolio programs anyway, which pushes you back to four individual loans, where the occupied units qualify cleanly and the vacant one waits for a lease.

Floors and structure: on condos most investors are quoting a 1.00 floor with the usual 75 to 80% LTV on a purchase, some go down to 0.75 with a rate and LTV hit, and a couple of no-ratio programs exist at lower leverage. Four individual loans versus one blanket: the blanket lets the package cover as a whole, so the vacant unit does not sink its own file, and it is one closing and one set of fees. The trade-offs are higher minimum loan amounts, partial-release provisions that cost you if you ever want to sell one unit, and the same 1.20-ish floor many portfolio lenders want on a blanket. On a $345k package the blanket is often too small for the portfolio programs anyway, which pushes you back to four individual loans, where the occupied units qualify cleanly and the vacant one waits for a lease.

Practical read on your numbers: this is a 1.15 deal that a specific rent assumption turns into a 1.20 deal. I'd underwrite it at 1.15, price accordingly, and treat a 1.20 quote as a bonus rather than the plan.

Steve Waller · Answer

Thanks Doug, and apologies for the slow reply on my own thread.

That is the formula I have seen used, and it is exactly what killed the package. HOA plus taxes were running at 43 percent of gross rent and coverage landed at 0.81, with nothing wrong with the rents themselves.

The variance I run into between lenders is not whether HOA counts, it is two smaller things. First, whether they give any credit for the master policy. A condo owner usually carries an HO-6, but some lenders underwrite a full landlord premium as if it were a detached house, and that alone moves coverage by a few hundredths. Second, how a special assessment inside the last twelve months gets treated. I have seen a one-time roof assessment loaded into the monthly obligation as though it were recurring, and the file missed by a rounding error.

Do you underwrite the master policy credit on condos, or the full premium regardless?

Doug Smith · Answer

Yes...HOA dues are part of the calculation. For rentals, DSCR = Rent/(PITI+HOA)

Erik Estrada · Answer

If this is an under 4 unit condo project, most lenders will allow a minimum DSCR of 1.00 or lower. PITI+HOA will be your monthly expense payment for each individual unit. I am seeing rates in the high 6s-low 7s at the time of this post, however you could get a rate in the mid to low 6s with a rate buy down

James Driscoll · Answer

The PITIA treatment is standard for residential DSCR programs, but not universal. Some lenders running DSCR on multi-unit packages, especially four units and above, will underwrite on a commercial NOI model where HOA dues sit below the line alongside taxes, insurance, vacancy, and maintenance rather than stacking into the qualifying payment. On your numbers, that shift alone moves you from a 1.15 to something closer to 1.35 stabilized depending on how the lender floors vacancy and whether they gross up for management. The catch is that a lender willing to do that on a four-condo package in the same complex is almost certainly going to flag the concentration risk and the condo project itself, because four units in one HOA means one board, one reserve fund, and one special assessment risk sitting behind all four loans. Warrantability is probably the harder problem here than DSCR. If the complex doesn't clear Fannie or Freddie's condo project approval requirements, you're already in non-warrantable territory, and the lenders who do non-warrantable DSCR tend to have their own underwriting guidelines that don't always match the residential PITIA model anyway. Worth knowing which bucket the complex falls into before optimizing the DSCR math, because the program options narrow fast once you're non-warrantable.

James Driscoll

Stacy Raskin · Answer

HOA dues are part of the DSCR loan calculation.

There are DSCR loan programs that have a DSCR 1 ratio program with best pricing which means in practicality the rent and the expenses can equal each other but usually the actual or market rent on the appraiser's rent schedule is usually at least slightly higher than the actual expenses. There are no ratio programs where the DSCR loan ratio is lower than 1 or the property mortgage, taxes, insurance and HOA expenses (for 1-8 unit loan programs) exceeds the rent but the rate will be higher.

Richard F. · Answer

Assuming a reserve funding plan for the current or upcoming year is available for the project, what weight do you place on the current "percent funded" when considering funding?

Robin Simon · Answer

HOA dues should always be in the DSCR Ratio - thats what the "A" is in PITIA!

#2 - condos (especially if its more of a "condo-site" in a 4 or fewer unit package) should have eligibility across the spectrum in DSCR ratio buckets, even under 1.00x or 0.75x if offered generally

Steve Waller · Answer

Good question, and honestly percent funded gets more weight from me than the dues number does, because dues are visible and a special assessment is not.

The way I use it: percent funded is the reserve balance divided by the fully funded balance in the study. Rough bands I work with are under 30% being a project where I assume an assessment is coming and I want to know when; 30 to 70% is ordinary and I read the funding plan to see whether they are climbing or sliding; above 70% I stop worrying about it and go back to the dues.

What makes it matter more on a package like this than on a single door is concentration. Four units in one complex means one assessment hits four times. Dues here are already $1,400 a month, 29% of stabilized rent. A special assessment of $6,000 a unit is $24,000 and there is nowhere to put it, because you cannot raise rent mid-lease and the file was 1.15 stabilized to begin with.

The number I read alongside it is the delinquency rate, because percent funded is a snapshot and delinquency is the leading indicator. A project at 55% funded with 3% of owners behind is fine. The same 55% with 18% behind is a project where the funding plan is fiction, since the money in the plan is money they are not collecting.

Coming out of 35 years in commercial credit, the thing that still strikes me about residential DSCR is that on a commercial file we underwrite a replacement reserve as a hard line item, and then on a condo package we take the association's word for it. The reserve study is the one document in the package that tells you what the building actually needs, and it is the one nobody reads.

So, heavy weight, but as a pair. Percent funded tells you the size of the hole. Delinquency tells you whether it is still getting deeper.

How does your lender treat HOA dues in the DSCR? A four-condo package example

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