The Ultimate DSCR Loan Guide for Multifamily Real Estate Investors #realestateinvesting #realestate

The DSCR loan is one of the best options if you're a new multifamily investor to get financing on your deal. Today, I'm bringing back Linda, one of my favorite mortgage brokers, one of our in-house lenders here at the Steppenwolf Real Estate Brokerage, because her first episode all about financing all types of rental properties was such a huge hit on the channel. You guys said you loved it and you said to tell you more about the DSCR loan. So that's what we're doing today. Real quick, if they didn't see the first episode, can you tell them who you are, what you do, what we're talking about today, DSCR loans, five to 10 units. Very excited. Linda Sinicola, I'm with PLB Lending. I'm a local mortgage broker here in Michigan. The first episode, we talked about all different types of financing for investors. Now, we're just going to zero in on that DSCR loan. We're going to talk about two different programs, the first being for two to four units, second, five to 10 units. Linda did a lot of my early loans, my two to four unit deals, a couple of single family deals. Linda has the mortgage on my house. I had no idea how good it was back then. At 3%. Definitely hadn't happened in history in what, 50 years? The DSCR loan is a newer product. It is. Yes. It is. So if I'm brand new, I'm watching this. It's like a buzzword though. It is. What is a DSCR loan? DSCR stands for debt service coverage ratio. What it simply means is does gross rent cover the cost and cost being PITIA, meaning principal, interest, taxes, insurance, and any association fees. Never heard of A before. Yeah, PITIA. Love it. Yes. Love it. So like simple example, if the property, let's say rents for $10,000 gross, let's say it's 10 units, thousand each. My PITA is 7,000. I could get a DSCR loan for this. Correct. First off, when did this come about? It's a newer loan in the last, I would say probably six, seven years. We've been writing a lot of these. They're very popular. And that's why a lot of people had questions about this. So what's the big advantage of doing like the DSCR loan versus like a traditional financing loan? Oh, it's huge. There's no income verification, no tax returns, no pay stubs, nothing. So it's based off of simply credit score, down payment and cashflow of the property. Those three components. That is huge because it used to feel, and it still sometimes feels like they do a colonoscopy on, we need three years of tax returns. We need your personal financial statement. We need your liquidity. Oh, you moved 10,000 over this. What was this for? So there's none of that? None of that. There's none of, have you managed, been an experienced investor? If you own a primary residence, you do not have to be an experienced investor. So that's another huge advantage to the DSCR. No job verification. No income verification. No, no income. Do they check my credit score? They do. Okay. So I need to have decent credit. You do. What credit is required to do a DSCR loan? Okay. A couple of different variations of DSCR. First, there's the two to four unit. Okay. On a two to four unit, we can go 20% down with a 700 score. 700 is a good score. Not an outstanding. It's a good score. We can go as little as 25% down with a 640 score. It's not bad. No, it's not. That's on a two to four. 25% down for like multifamily. So guys, remember I was listing this five units and above, we consider multifamily. The internet goes crazy when I talk about this, Linda. Right. The hate I get when I say two to four units is single family. They're like, no, it's small multifamily. It's like residential multifamily. Right. It's still residential. We consider it small multifamily. Yes. Yes. Commercial five and above. 25% down is pretty standard. It is. So you can do 20% down on some of those? We can do 20% down on four units. Four units or less. When we get to five to eight, it's 25% down. Looking for a 720 credit score. What you've done in the past is if there's like three, four plexes on a property, you can make that 20% down. Yeah. Who's this for? And is there anyone who you'd say like, shouldn't use this? This seems like there's really not negatives to this as long as the deal is good. There's not as long as the deal is good. So I would say it's good for anyone. No income verification. That's crazy. I mean, that's just a huge, huge part. Any liquidity requirements? There's some reserve requirements depending on the loan size, anywhere from six to 12 months of reserves. Not bad. But you can use your retirement account as reserves. So like if I have a 401k? If you have a 401k, if you have an IRA, any of that can be used as reserves. I find a deal, seven units. I'm working with my broker. They send me to you like, what are the first steps of seeing if this qualifies for a DSCR loan? Well, we'd run the numbers. Okay. So on anything that's five to 10 units, how you're going to underwrite it is you're going to take the gross monthly rent. Okay. But this even gets to be a little bit tricky because your rent rule might be under market rent. So we're going to go off the appraisal, what the appraiser is going to tell us market rents are. Can the broker tell you what market rents will be? Well, the appraiser has got to tell us. It's got to come from the appraiser. The appraiser does their research to figure out what comparable rents are. Let's say I find a value add deal, which is what we push everyone to buy. Find an under market deal because that's how you make your money. Force the value to go up by increasing the rental income. Let's say I find a deal and it rents for a thousand bucks, but the appraiser knows it should be renting for 1500 bucks a unit. We're going to use the market rent. You guys understand what she's saying here. She'll be able to show cashflow, not at what we call as is or historical performance. You'll go off of what the cashflow can be so they can finance maybe deals that like a bank or a credit union wouldn't do. Right. Because a bank or a credit union is going to look at what did the last 12 months do? That's what they look at. A bank and a credit union is also going to be looking at vacancy. We can do 100% vacant property with the DSCR loan. Okay. So 100% vacant property. So you're saying I could buy an eight unit. Everybody just moved out. Maybe let's say they fully renovated it. They haven't leased it up yet. The appraiser says, hey, these are going to rent for 2000 a unit. You could do a loan. Correct. That's crazy. Based on that. What we're going to do to underwriters, we're going to take the comparable rent schedule, which is going to give us gross rent minus any management fees. And then we're going to divide that by the PITI. Who sets the management fees? The appraiser or the individual? It would come from the seller. Got it. What if they're like, I self-managed. Then there's no management fees. Then we use 100% of gross income. That's huge. Banks and credit unions always make you slap on 5%. That's what Andrew and I always run up against. We're like, well, we self-manage. We don't charge a management fee to our own company. Like, no, we always have to underwrite 5% of gross rental income to a management fee. So you don't have to do that. No, we don't do that. We just go off of what the appraiser tells us. It just seems like this loan product is very flexible. And if I'm explaining this correctly, it seems like you care all about the deal, not about the individual. It's a 50-50. What does that mean? So to me, it's like if the deal cash flows. The deal just has to break even, honestly, to make the deal work. So it doesn't even have to cash flows, just break even. It's got to be a 1.0. So let's say rents are $10,000 and we've got a 10 unit. And with taxes, the mortgage payment's $10,000. You take the rent, divide by the PITI, you get a 1.0. I mean, in most cases, it's going to come up higher than a 1.0, but yeah. So this is really good for an under-market deal. Absolutely. Because you can look at where it's going to be at and do the financing. What do I need as a borrower to have to qualify on this? You need a credit score and you need liquidity. What's nice about the five to 10 unit is I only need one month of bank statements. What do you need for a traditional loan? Traditional, two months. We're going to go back and make sure your funds are seasoned, where now we only need a 30-day bank statement. Gift funds are also allowed. Gift fund means your family could chip in. So if I go to buy a house today, you need like two years of income. Two years of income. I need at least your last two months bank statements to track all your money. Credit score. Liquidity. You need to verify my job. You need a two-year work history. But I can go buy a cash flowing multi-family, no job, credit score, one month bank statement. And the deal. That's why we push you guys. One to four units is great. Two to four units is cool. If you could go get a seven unit apartment based off of the income the apartment produces versus the income you personally generate, it's a world of a difference. Oh, it is. It just opens up so many doors. Is it still 10 conventional loans only? Yes. Okay. Danny and Freddie will give you 10 mortgages. So when I was buying one to four units, this didn't exist. Linda was financing all my deals and we were getting it done. But each deal got a little bit harder because they're like, we want more income verification. Why is he buying so many rentals? You were able even to do an 11th loan for me on a portfolio lender. Correct. What's the difference between a portfolio lender on a DSCR lender? That type of loan, that portfolio was actually what we call now a DSCR loan. So I did a DSCR loan before the DSCR loan. Correct. But I remember every time you're like, hey, Tony, I need updated personal financial, updated income statement. It started making me get a little exhausted. You were great. You were awesome. She always got it done. I will say I've worked with so many lenders. Linda's one of the rare few who what she says she's going to get, she gets it and closes the loan. But a lot of people don't deliver. All this to share with you guys that a lot of people will promise a unicorn and then deliver a donkey. Working with Linda back in 2021 has always what she says is what she will give you. That's rare. Had this loan product been around when I was starting up, it would have made things so much easier. And not only that, the time. There's so much time you got to take to provide these documents. Right, to do your loan. Yeah, yeah. So is this a loan quicker to close? It is. Okay. It is. If we go under contract today, how quick can you close a DSCR loan? It's 30 days. A commercial loan is 60 to 90. Sounds like we're making the DSCR loan really, really good. Anyone can do it. Right. The no job thing is huge. But it's really the way multifamily should be is does the deal work? Not do you work? You buy a house, it's like, well, do you have money? Are you making money? Can you afford all this? Is there a debt to income with DSCR? It's a no ratio loan. There's no ratio. There's no income. The application's blank when it comes to income. So we don't even calculate out a debt ratio. Like you could have student loans. You could be carrying multiple car payments. There's no ratio. If there are any negatives, what are they with this type? There's a prepayment penalty. So on your two to four units, there's no prepayment penalty. So let's go to a particular local bank here. Your five to 10 units, you're going to have a 1% for three years. So what that means is let's say you want to refi in a year, in the first three years, you owe a million dollars. You're going to owe a 1% penalty when you go to pay it off. What if I refinance it with you? If you refinance with back to the same lender, yes. We have an ability to waive. Now, if I sell it, do I still pay the prepayment? Or is it only I pay the prepay if I refi with a different lender? If you refi with a different lender. So if I just sell it, I'm not paying the prepayment. Correct. That's not bad at all, guys. I've had refinances where I paid 4% prepayment and tried negotiating with them on it. Right. No, they don't care. They're like, no. They don't care. Why don't lenders want to be paid off? Oh, because I mean, they're pricing the loan so that they're over that time period is when they're making the money off their servicing. Linda, how do banks make money? They make it off their servicing. Lending. Right. Exactly. Prepayment penalties, like Linda's saying, guys, is the bank has put this money to work. If you pay the money back to them, they're not making any money off of lending the money. So if you get something where it's 0% prepay or 1%, there's so much flexibility there. That is huge. I appreciate you sharing that because something we always try to talk about is like the financial education that banks are not savers. Banks are lenders. As individuals trying to get ahead in life, we can't be savers. We have to borrow money and put money to work. Same thing the bank does. The bank borrows savers money and then lends it out. The bank's not lending out Mrs. Bank's money. It's your and I's money. Correct. To investors. I really appreciate you sharing that because it gives people perspective of like, if the bank's borrowing money to get ahead, I need to do the same. So if I want to get started with the DSCR loan, what's the first step? What do I have to do? Call me. Let's go. How do they call you? They call me at 248-931-9600. Michigan only though, right? For these? No, I can do 35 states. These loans. 35 states? 35 states. Wow. I did not know that. Yeah. DSCRs. Okay. 35 states, DSCR. You call me. I need to have the deal ready though. What do you need to see from the deal? From the deal, we just need to know what our rents. Give me an idea. If they're under market, what do you think market rents are? Can I just tell you or do I need a rent roll? You need a rent roll. You need to show me what current rents are, what you think the new rents are going to be. Then we'll run the payment from there. We'll get the credit report done. You're going to send me your assets and we'll get the deal done. Let's say I have a four unit on a conventional loan right now. Can you refinance it to a DSCR loan? You can. You can cash it out to 70%. Not bad at all. Every cash out refinance I've done has been between 70 and 75%. Right. That's something people get confused on. They're like, well, can you cash out a hundred percent? You always have to leave equity in a deal. You always should leave equity. It's like your buffer. Then if you have to go to sell it and you're a hundred percent leverage, there's no money. The bank doesn't want a hundred percent leverage too. Which totally makes sense. I think that's where sometimes people, because everyone's like, I want 80% loan to value, 90% loan to value. I think the whole point of real estate, as we're saying in my 42 unit apartment, I sleep well at night knowing God forbid a major life event happens. I can sell an asset and there's money there. Right. You have equity. If there's a hundred percent leverage, you're not secure. If you have to sell something because of life, there's no money there. You know what I mean? Okay. So these deals, you can close in your LLC, your corporation, or a partnership. Super easy. I can get you all the details on that. So if I buy it and I close in an LLC, is this showing up on my credit report? It is. Okay. Because you're the borrowing partner. Your title, your management will all be in your LLC or your partnership. So next steps would be get my deal, reach out to you. Yes. Anything we didn't talk about with the DSCR. Seller concessions are allowed on these deals up to 6% of sales price. So if I have a million dollar sales price, I can get 60,000 concessions. You could. I mean, not that it's always going to happen. Yeah, yeah, yeah. It's market conditions, but it's allowed. So I can't go above 60,000 or 6%. If I buy a conventional loan, is there a limit on concessions? There is. On investment property, only 2%. This loan gives you an extra 4%. What about a primary residence? Primary residence, you can go up to 6%. So if I buy a million dollar house and there's like a massive basement foundation leak and they're like, it's 150 grand, they would just have to lower the price. You can't be like 150,000 cash to close. There's a lot of intricacies. That's why you guys have to work with a great professional. So this was everything on a DSCR loan. This loan, had it been around when I first got started, would have made my life a lot easier. I'm always bringing in real experts that I utilize in my life to help you get to your goal. So as always, thank you so much for watching. If you have any questions on the DSCR loan, put them in the comment section. We can get Linda to answer them. If you found this episode valuable, as always, just drop a meaningful comment, hit the like button, make sure to share it with someone. Reach out to Linda if you have any questions. I know on our last episode, a lot of you reached out to her and she answered all your calls, your emails, your text messages. We do this to help you guys get to your goal. So as always, grab all the free resources in the link in the description. Want to learn more about our mentorship club? Click the link in the description. As always, we'll talk soon. Thanks.