EP.20 - DSCR Loans for 5+ Units - A Different Game Than 1-4 Unit Financing

Think DSCR loans are one-size-fits-all? Think again. Once you cross into 5-unit and above territory, the rules change — and so do the opportunities.

In this episode, we break down how DSCR financing works for 5+ unit residential properties and why it's a completely different product than the 1-4 unit DSCR loans most investors are familiar with. From how lenders underwrite the deal to how debt coverage ratios are calculated across a larger rent roll, we walk you through what to expect and what lenders are really looking at.

We also share a real-life client example of someone who used a 5+ unit DSCR loan to acquire a property, showing you exactly what the numbers looked like — purchase price, payment options, and how the debt service coverage ratio played out in practice.

Plus, we dive into why interest-only payments can be a game changer for investors working to stabilize a property. When you're filling vacancies, making improvements, and pushing rents to market, that lower monthly obligation gives you breathing room and more cash flow right when you need it most.

Whether you're scaling from a fourplex into your first small apartment building or actively shopping for 5+ unit deals, this episode gives you the financing playbook.

For additional resources, loan scenarios, or to connect with our team directly, visit us at www.seimortgage.com.

⭐ If this episode helped you, SUBSCRIBE, leave a 5-star review, and share it with a fellow business owner or investor who needs to hear this!

All information provided in this podcast is for educational and informational purposes only. Nothing in this episode should be interpreted as: Legal advice Financial advice Tax advice Real estate advice A commitment to lend An offer, quote, or guarantee of loan terms Loan guidelines, program availability, rates, underwriting rules, and qualification methods — especially for Non-QM mortgage programs — can change at any time and may vary by lender, investor, market conditions, and state regulations. Examples given are hypothetical and may not reflect actual terms available to any borrower. Listeners should independently verify all calculations, assumptions, and program details with qualified professionals. Always consult with a licensed mortgage lender, real estate agent, CPA, financial advisor, or attorney before making decisions related to home financing, investing, or credit. This podcast is not affiliated with, endorsed by, or acting on behalf of Fannie Mae, Freddie Mac, FHA, VA, HUD, or any government agency. No government agency has reviewed or approved the content of this recording. The Turkey Foundation, Inc. 1805 E Garry Ave, Santa Ana, CA 92705 Equal Housing Lender

Transcript

SPEAKER_00 0:00

So you've done a DSCR loan before. Maybe you purchased a single family residence or a duplex. You know how the process works. You know what the lender needs. You know how to pencil out the numbers. And now it's time for you to put your big boy or your big girl pants on and move into the five and above unit space. And you figure, hey, no problem. Same products, same terms, easy. Not so fast. As soon as you add that one additional unit, making it in a five or above, it's a whole nother ball game. Welcome back to another episode of the SEI Mortgage Podcast. I'm your host, Ryan Marks, and we are dedicated to those of you who are self-employed or real estate investors looking to build your real estate portfolio or purchase your very first home and don't fit into the traditional big bank sandbox. On today's episode, we're going to cover how the DSCR loan can still be used for a five unit and above building, but some things that you need to be aware of. So before we unpack all of the nuances or qualifications associated, it's important that you understand that as soon as you leave the one to four unit space, you are technically considered commercial financing. So any traditional bank, even if they offered this product, which they do not, would consider this type of asset a commercial property, and it's subject to all the commercial financing terms and qualifications associated with that. So if you think about it, DSCR essentially is a version of commercial financing. We've covered this in lots of other episodes, how you use debt coverage instead of traditional income documentation to qualify. Well, that's essentially what commercial financing is. If you were to go out and get it for buying your own building to run your business out of or buying some 70, 80 unit apartment building, it's essentially using debt coverage as its parameters to qualify. However, it is just as difficult to qualify for commercial financing, even if you're utilizing this debt coverage approach, if you're going with these standard big banks where you're opening up all your tax returns and other documentation, going through everything with a fine-tooth comb. So let's talk about how we can use this DSCR product even in the five unit and above space so you can further build and grow your portfolio. So number one, this type of loan product does require a higher credit score on average of a 680 or above to utilize this financing, where the DSCR one to four, we go as low as a 600 credit score. Number two, you need a minimum of a 25% down payment. Sorry. So if you're getting to this level, just prepared to be shelling out some shekels in order to pick up this property because 25% down payment is the minimum and it still has to debt coverage. We'll go over that a little more in just a second. Number three, you need reserves. Unlike the one to four unit space, where a lot of these programs require zero reserves, these programs often require six months mortgage payments, including taxes and insurance, in reserves that have to exist in order for you to utilize this financing. Number four, the rates are typically higher and the fees. So I hate to break it to you, but you have to make sure that it pencils out because you're often going to get higher interest rates when you're moving into this like technically commercial space financing. But the good news is there's still plenty of profitability out there, and we're gonna further unpack what that looks like. So, what's the same between the one to four unit DSCR versus five and above? Number one, being the biggest, you're still going to use debt coverage in order to qualify that loan. So as long as that property is doing a one or greater, you have the ability to utilize financing. Although the one to four unit space does have a lot more creativity in order to bridge that gap. This needs to be more straightforward, and unfortunately, you can't do like a no ratio or just keep increasing your down payment. Number two, you're still going to use 100% of the fair market rent average or a hundred percent of the existing lease in place in order to meet that debt coverage to get financing for the DSCR loan product. Number three, the interest only option is also still available. This is a huge bonus because if you do locate a property that's distressed or it's not quite getting fair market rent, you're getting a slamming deal on it, you can utilize an interest-only payment in order to make sure that you're breaking even or making some positive cash flow while you further stabilize the property and increase the rents. And we'll touch on that a little more in detail in just a bit. Number four, another big one, you still need no job. Your property is the income to qualify for this loan. So we've talked about this on numerous other DSCR episodes. You could have no job, you could have a job, you could have a business, it could potentially be reporting a loss. It doesn't matter. These loans are still qualified in the same sense that we're looking at your qualifications through the property itself, and it does not have any sort of debt-to-income ratio requirements whatsoever. Number five, you can still use up to a six percent seller concession on these types of loan products. So, what that means is normally if you were gonna go out and buy a one to four unit investment property, guess what? Traditional conventional financing, you can't get more than three percent of the purchase price in free money from someone. That would be the buyer's agent, the seller's agent, you know, the seller, whatever the case may be, it's limited to 3%. Whereas in the DSCR space, we can go up to 6% on these in the one to four and the five and above. There is some nuances with this, so you want to make sure that we go over how you're gonna structure your offer before you actually go under contract if you're trying to use those seller concessions to basically pay for your closing costs or further buy down your rate, but it is an option that is available to you. So let's use an example of a client that we just priced out that went under contract. He's purchasing a home for$800,000. It's a six-unit apartment building, and some of them are rented and some of them are not rented. So we're gonna use the fair market rent when we get the appraisal back with three rent comparables and use the middle of the rent road average. So, for example, if the rent is$1,000 for one comp,$1,250 for another comp and$1,500 for the third comp, we're gonna use the middle of the road$1,250 rent plus all the existing lease agreements on the existing tenants in place and 100% of that. From there, we're then going to calculate what our payment looks like to see if this property is gonna debt coverage and if we have a deal or not. So for this example, an$800,000 purchase price, we have to put 25% down. So your loan amount is going to be$600,000. You're gonna have to put that$200,000 down payment plus your closing costs unless you're getting some seller concessions to offset that. And for this example, the client got a 7.125% interest rate at a one-year prepayment penalty. So, full disclaimer interest rates are different for everyone based on your qualifying criteria like your credit score, property type, down payment, occupancy. But for this example, we're going to use a 7.125%. I'd be happy to quote you what the current rates are whenever you're watching this video and you're looking to see if it debt coverages for your asset. Back into the example, we're using one and a quarter percent on average for the property tax rate. So$800,000 property times 1.25% divided by 12 is going to give you an estimated property tax of$833 a month. And we're gonna say the insurance is around$200 a month for this particular building. So altogether, that added up. Your PITI is$5,325. So that means you need your total rents to equal$53.25 or more in order to debt coverage on this property to utilize DSCR financing. In addition to that, if you made it this far, that would mean you'd need six months' reserves totaling around$31,950. So a couple things to point out on the reserve piece. This doesn't mean you just have to have$32,000 sitting in your bank account right now, ready to go or moving it somewhere. We just need to show that these assets exist somewhere in other financial institutions. That could be your$401, a brokerage, your business checking, your personal checking or savings, whatever is considered liquid assets that you could actually access in an emergency, we can use those assets to meet that six-month reserve requirement for the subject property that you're purchasing. There are a few nuances with these particular assets, so it's important that you tell us what type of assets you have these liquid funds in because we may not use 100% of the available balance. But as long as we have what we need in order to meet that six-month reserve requirement, you don't need to touch those funds. You can leave them exactly where they're at. So that would be the traditional payment on a fully amortized, 30-year fixed PITI payment. So, what if you need to squeeze a little more wiggle room out of the payment while you work to stabilize this property? Remember, you can use interest only payment. So for this particular example, my client utilized the interest-only payment option while they work to stabilize the rents and further get positive cash flow. And then the intention is we're going to refinance out of this property into a more competitive 30-year fixed rate, either just by receiving more rents or interest rates have come down. And that's the long-term play for the foreseeable future. So, how we did this was the loan is amortized for 30 years, meaning at the end of the term, the loan has to be paid in full. However, he has the ability to make interest only payments on the loan for up to the first 10 years of the term. So whether he makes them or not, he has the interest only payment option. What you have to understand though is if you hypothetically stayed in that 30-year IO loan for the entire term and you made no principal payments throughout the entire first 10 years, your loan is essentially going to be a 20-year term when it gets to that 11th year because it has to pay itself off. So just keep in mind that you're looking at the full big picture of what you're wanting to do with this product. So that way you have an exit strategy for what the long-term play is in order to fully get this asset performing on what you need it to do for rent, but is a great alternative in order to positive cash flow right out of the gates. So at this example, if we use the interest only payment option, the IOTI is$45.4550, which now gave him$679 a month in additional cash flow because he's utilizing the interest only payment option. So to recap, here's your checklist: 25% down payment or greater, credit score of 680 or above, you still need no job, debt coverage of 1.0 or greater, you can use 100% of the fair market rent or 100% of the existing leases in place, six months' reserves needed, expect higher interest rates. So if you want to avoid all the hurdles in the red tape with traditional commercial financing, when a property is over four units, the DSCR loan, in my opinion, is still the best option to build a strong portfolio and avoid sleepless nights of worrying about your lender calling you the next day halfway through the transaction telling you sorry, you don't qualify. And if you are experiencing this right now, there is hope. These loans close very quickly. I would welcome the opportunity to structure a DSCR program for you to make sure we save that deal so you can put it in your portfolio. And for other great tools and resources, head over to SCimortgage.com where you can get in touch with us or check out other phenomenal products available. Thank you so much for being a part of the community and remember to let your income work smarter, not harder. We'll see you on the next one.