Debt Service Coverage Ratio Loans- What are they?
-This is a transcript from Go Gaddis Radio to listen to the episode click here-> https://on.soundcloud.com/fWPxS
Welcome back to Go Gaddis Real Estate Radio right here on AM nine 20. The Answer. I'm Cleve Gads and I really appreciate you sticking with us through the break in this segment. What is a D S C R loan? And why do you, if you're listening and you'd like to be a real estate investor, but you don't know how you can do it, why do you need to know what they are?
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We're available on all major podcasting platforms. Without further ado, I'd like to introduce a very special guest, Joe Friton. Am I saying that correctly? Friton. You got it. First try. Awesome. Perfect. And you know what, I normally, I would have tried that before I got you on the air, so I'm like, whew. Thank goodness I got that right.
I like to pronounce people's names correctly. You are a commercial broker. You are the c e O of c r e, lone Wolf, l l c, and you and I met because you are doing a D S C R loan for a buyer who is buying one of our listings. Before we jump into that subject, You mentioned to me the other day that you were moving your motor home, and I know that you're coming to me on this beautiful Saturday from your motor home as well.
Are you living in a motor home? I just asked because I'm so interested. Someday I'd like to have a little motor home and I'd like to travel just a little bit. It's a lot of fun. Well, if you go on the YouTube rabbit hole, uh, deep dive, you'll find people that are full-timers and part-timers. I guess, uh, at this point I'm gonna call myself a most timer, especially during the, uh, snowbird months.
Okay. Uh, I am in that, uh, motor home right now, so pardon me for any, uh, uh, noises of children playing and things like that be so good. So home for you is Michigan, is that correct? Correct. Yes. But you can do loans. You can do loans in Georgia and you can do loans in most states throughout the country. Not all states, but most of 'em, right?
Yeah. Uh, I would say, uh, a great majority of states, um, when it comes to commercial lending, the. Uh, uh, federal requirements that are a bit looser as long as we're taking good care of people. Um, staying inside of, uh, the, uh, following the rules, , following the rules. That's what I'm looking for, following the rules.
I totally understand that. Now, so what is the difference in a commercial loan and a residential like a Fannie Mae or a Freddie Mac or an FHA or U S D A or VA loan? What's the. When we're talking about an investment loan, we are going to qualify the, um, purchase of the refinance of that property based on the, the property income, uh, the, the borrower's, uh, experience in, in owning and managing investment real estate and things like that.
We're not going to need, uh, any heavy hitting underwriting, uh, information like tax. Um, employment, uh, verification, all that kind of stuff. It's really based on the asset itself. So a commercial loan is, is either approved or denied based on whether or not the property qualifies for that, not necessarily my credit history or my income.
Is that correct? Am I understanding that correctly? For the most part, that's correct. Uh, it is ly impact a loan product. Um, we do qualify the borrower in a couple of different ways, especially if we're doing a heavy rehab or something like that. We wanna see experience in handling a project like that. Uh, we do wanna see, um, uh, good credit responsibility in the form of that credit score and, okay.
You know? Okay. So you've gotta have, you've gotta do right and act right. You can't, if you haven't paid any bills on time for the last year, you can't expect to apply for a Dscr loan and get approved. So you need to do the right things for yourself financially, credit wise, and then you need to find a property that is a good investment.
Then I would assume that for these commercial loans, the money comes from either private lending institutions or banks or something like that. It's not coming and being insured by the federal government is that. Correct. They do get securitized, especially these Dscr loans. Um, but they're generally being originated by a direct lender.
Yeah. Uh, so they underwrite and fund that loan. But, uh, to keep themselves capitalized for next month's, uh, funding, they go ahead and sell that note to a big, uh, institutional note buyer who then goes along and, uh, securitize, maybe slices it up and sells it off to, to a bunches and bunches of people. Okay.
So , what this is a big setup for, what is A D S C R loan? Tell us what D S C R stands for first. Yeah, happy to. D S C R stands for debt service coverage ratio. Okay. Uh, to break that. The income of the rental property, uh, covers the cost of the, uh, mortgage expenses. Okay. The taxes and insurance, and provides a bit of profit to the borrower.
Yeah, a bit of protection there. The borrower needs to make some profit to make it. Makes sense. So let's take, let's, let's think about this for just a minute. Let's say we've got a property and it, um, it, uh, the cost on the property would be, you know, $2,000 a month. And so what would the D S C R, what would the debt service coverage ratio need to be today for most people to get approved?
I know it's either, you know, like 1.1 or 1.2 or 1.3, which means if we took the 2000 and let's say it was a 1.1, then that means I need to be able to rent it for 2200. Is that. You've got it to basically correct there. Um, that ratio, the programs generally allow flat coverage at one flat for a certain period of time.
Uh, there's a couple of tricks that we can use, like an interest only period for up to 10 years to improve that debt service. Of course, if it's non amortized, uh, to improve the debt service ratio. But, uh, you are correct. And the ideal service ratio is 1.2 or greater 1.2, is that what you said? One point.
Correct. So interesting. 1.2 or greater. Interesting. So if you are a, maybe you have a, a job as an employee, or maybe you're a real estate agent and you have, you know, good income, but you're not sure that you've got enough money to put 20 or 25% down, or maybe even 30% that might be required for some of these investor loans than a debt service coverage ratio loan might be right for you.
Now, let's just say that the par rate for a mortgage loan today for a. Um, a person buying a home, putting 20% down, let's just say that. six and a quarter. I know that when I would get loans as investors, instead of paying six and a quarter for an investor loan, I'd probably pay seven in a quarter cuz there'd be a little bit of a premium because I was an investor.
And so for A D S C R loan, I, I would imagine they come with a little bit higher interest rate because the investor in my opinions, taking additional risk because, you know, they're not necessarily underwriting me the way they would other places. What would that premium be? So what I'm asking is how much more interest would you pay than you might pay on to purchase a single family home?
It's not egregiously much more. Okay. Uh, you're on the right track there. The risk profile, uh, the risk exposure for the lenders in this space is a bit elevated, so the rate is a bit higher. Yep. Um, if, if a conventional conforming loan is getting six and a quarter, um, I have seen in recent days the floor rate on some of these dscr r.
Uh, advertised at, um, 6.5 with, that's the floor rate. Now, once we go for maximum LTV, and maybe we've got a, a credit score that's not, you know, above seven 20, where Ideal is something like that, we're gonna get, uh, an elevated, I'm seeing most of them come in between, uh, as you mentioned, seven and a quarter to.
Uh, for less favorable situations up to nine and a quarter, something like that. Yeah. But I would assume that nine and a quarter is really risk based. Meaning it's like, hmm, this one's barely making it from the numbers, or, you know, the person's credit profile's not the best. So it sounds like for someone who is qualified, For someone who is buying a good property, someone who takes care of their financial stuff so they've got a good clean house.
It sounds like that these loans could be about the same price as getting an investor loan from Fannie Mayor, Freddie Mac. I know they're not making the loans directly, but that's where the rates are being set from. So it sounds like there's not, uh, a lot of additional charge there. If someone, Joe, wanted to reach you, how would they do that?
What's the easiest way for them to reach you and are you the kind of lender. That you're happy to discuss kind of any mu any situation with anybody, even if it turns out they can't do it, you're still happy to have that conversation with 'em? Yeah, it's always fun to, uh, coach folks through, especially, uh, if they haven't had their feet in the, in the water, uh, too long and they're looking to figure out how to get it done.
I can run numbers, I can take a look at properties. We can do everything from new construction spec builds, um, large multi-family change of use, you know, if we. A, um, an old building with lots of space in it. We wanna fill it out for apartments. We can do that. Oh, wow. As long as we've got the experience and the, and the financial wherewithal.
Um, I'm always happy to talk about any, uh, uh, opportunities that somebody's excited about, because that, that's a lot of fun for me too. Perfect. You can reach me by phone or email. Okay. Uh, email being Joe at c r e loan wolf.com. And that's loan, like a money loan. Okay. And, uh, my direct phone number, two oh two eight five four nine six five.
So Joe at c r e lone wolf.com. Correct. And phone number One more time. That was 2 0 2 8 5 4 Wolf. Wow. Two I. I would say it again. Say it one more time. 2 0 2. Yep. 8 5 4 9 6 5 3. Perfect. I love that. I love that. And how long have you been in this business? How long have you been doing these kinda. Well, I've got 10 years in custom construction and high-end remodeling, uh, with, uh, a few years of sales in that space as well.
Um, so that's what primed me towards, uh, customer service and exacting details, things like that. I have been in the, um, private money investment loan space for, I think this is my sixth year now. Yeah. Interesting. Well, I know that you're representing a buyer. We've got about two minutes left in the segment.
You're working with a buyer that's buying one of our listings, and I was sort of triggered because the purchases in the buyer's own name, but the, but the purchase needed to be put over into the LLC of the buyer, because I would assume that's the. S CR loan is to the llc. And normally that throws up Red Flag says you can't do that.
You can't buy in the LLC name if you're getting a, a loan that's insured by Fannie or Freddie Mae or, uh, Fannie Mac, or Freddie Maye, Fanny Mae or Freddie Mac. Easy for me to say. Um, and, but with you, you can. And when I called you, I just have to say that you. You were very attentive. You got back to us very quickly.
You answered questions, you didn't, uh, you know, get your feathers ruffled that we were trying to figure out, hey, what the heck is going on here? Sure. So I invite you, if you're listening, and a D S C R loan might be something that you're interested in. I invite you to reach out to Joe. I think you would find the experience to be very good.
I think he is, would probably do the right things, uh, in order to take care of you. So Joe, um, how, how, are there any, and we've only got about 45 seconds left, are there particular mistakes that you see people make with trying to get a D S C R loan that you could give some little advice on how to. . Well, the first thing for success, thank you for any recommending folks reach out to me.
Um, as a, as a broker and a loan officer and a property investor myself, yeah, it is absolutely invaluable to develop a relationship with a broker or. Um, uh, a loan officer, especially your, your realtor. Yeah. Uh, develop a relationship with somebody that you can count on to return your phone calls and answer your emails and be helpful.
I love that. So there's so many folks out there on, and, and I'm so sorry we're running up at a hard break. I so appreciate you being here. Yeah. Will you come back and talk to us again sometime soon? Very happy to anytime. We're gonna take a quick break. When we come back, we're talking biodegradable straws and what on earth do they have to do with Metro Atlanta and what are the pros and the cons of buying a real historic home.
We've got those subjects and more Stick with us. We'll be back.
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