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DSCR Case Scenario
If a deal is a cash-out refi, on a DSCR loan, you need to know the loan amount and LTV, credit score, zoning, term of the lease, nor credit scores, or how long the house has been owned, the price that was paid for the house. If this is a bridge loan short term, you need to know whether it will be a 25/30 year term house is a residentially zoned neighborhood, if it’s in a commercial zone, or a permitted or conditional use permit. All of these answers will determine the type of loan along with its term, penalties, and rate, and if we can use the rental agreement VS the rental appraisal supplement 1007 (the appraiser will also perform a rental market analysis report called 1007 if a 1004 appraisal is used). Need to know if it will be for the long-term agreement for the state-certified daycare. This information determines how we will see the house classified and what type of loan will be required. Just because the lease is in place does not mean the lease amount will be used to calculate the DSCR because 1007 will also give a number, and it’s the lower of the two.
If this is a house with a conditional use permit, I could require a rebuild letter from the city or county, and The DSCR would go off the Appraisal rental supplement.
Please note that the definition of debt service coverage ratio (DSCR) is net operating income divided by total debt service. -
1 Reply
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Thank you for providing this detailed DSCR (Debt Service Coverage Ratio) loan scenario. You’ve highlighted several important factors lenders consider when evaluating a DSCR loan application, particularly for a cash-out refinance. Let’s break down the key points:
Loan Details Needed:
- Loan amount
- Loan-to-Value (LTV) ratio
- Credit score
- Property zoning
- Lease term
- Property ownership duration
- Purchase price of the property
Loan Type Considerations:
- Bridge loan vs. long-term financing (25/30 year term)
- Zoning: residential, commercial, or property with a conditional use permit
Rental Income Verification:
- Rental agreement
- Appraisal rental supplement (Form 1007)
- The lower of the two is typically used for DSCR calculation
Special Use Considerations:
- For state-certified daycare, long-term agreement details are crucial
- A conditional use permit may require a rebuild letter from the city/county
DSCR Calculation:
- Net Operating Income / Total Debt Service
Additional Factors:
- Property classification based on use and zoning
- Potential prepayment penalties
- Interest rate determination
Appraisal Requirements:
- Form 1004 appraisal may be needed
- Form 1007 (rental market analysis) is typically included
You’ve correctly pointed out that the presence of a lease doesn’t guarantee its use in DSCR calculations. Lenders often use the lower of the actual lease amount or the market rent determined by the appraiser (Form 1007).
For properties with special use cases (like a daycare) or conditional use permits, additional documentation, such as rebuild letters, may be required to ensure the property’s continued viability as a rental.
This comprehensive approach helps lenders assess the risk and viability of the investment property, ensuring that the rental income will be sufficient to cover the debt payments and associated costs.