DSCR and Investment Property Loans in CT

What a DSCR loan is and how the ratio works

A DSCR loan is a mortgage on a rental that is underwritten on the property's income. Take the gross monthly rent and divide it by the full monthly housing payment: principal, interest, taxes, insurance and any association dues, which lenders call PITIA. If the rent equals the payment the ratio is 1.0; if the rent is a quarter higher it is 1.25; if the rent falls short it is below 1.0. The rent comes from the lease if the unit is occupied, capped at the market rent on the appraiser's rent schedule, or from the appraiser alone if it is vacant.

The lender does not calculate your debt-to-income ratio (DTI), the share of your monthly income that goes to debt payments, and on most programs income is not stated on the application at all. That is why these loans suit investors with heavy write-offs, many properties, or income that is hard to document.

What ratio DSCR lenders want to see

There is no single rule, but the ranges are consistent. Most programs want a ratio of at least 1.0. Many price better at 1.25, and some have a top tier at 1.5. Several lenders go below 1.0, usually to about 0.75, in exchange for a larger down payment and stronger credit, and a few offer no-ratio loans at a lower loan-to-value (LTV), the loan amount as a share of the property's value.

• Taxes move the ratio more than people expect. Connecticut towns tax 70 percent of assessed value at a mill rate that varies widely, and the underwriter uses the real bill.
• Shoreline properties in Milford, Stratford and Bridgeport can carry higher insurance and, in a mapped flood zone, a separate flood policy that counts in the payment.
• An interest-only option lowers the payment used in the ratio on some programs, which can turn a 0.95 file into a 1.1 file.

Rates change daily and are priced off the ratio, your credit, the LTV, the prepayment penalty you choose and whether the loan closes in an entity, so I do not print one here. Send me the property and I will quote it.

Who qualifies: credit, down payment, reserves and LLC vesting

• Credit. Most DSCR lenders set a minimum in the mid 600s, with pricing steps above 700 and 740.
• Down payment. Expect 20 to 25 percent on a purchase, more if the ratio is below 1.0 or the property is a condo or a short-term rental.
• Reserves. Months of the full housing payment left in the bank after closing, usually three to six on the subject property, plus a smaller cushion for each other financed property you own.
• Experience. First-time investors are accepted by many lenders; a few require that you already own a home or a rental.
• Property. One- to four-unit homes and warrantable condos are standard, and some lenders do five- to eight-unit buildings under a small commercial program.
• Vesting. You can close in your own name or in an LLC with a personal guaranty; your credit is pulled either way. For an LLC the lender wants the articles of organization, the operating agreement, the EIN letter and a certificate of legal existence from the Connecticut Secretary of the State, and title and insurance must match the entity name.

How a DSCR loan works, step by step

DSCR versus a conventional investment property mortgage

A conventional investment property mortgage through Fannie Mae or Freddie Mac is usually the cheaper loan if you qualify. It uses your tax returns and a DTI calculation, counts most of the rent toward qualifying, caps you at ten financed properties, and follows the regional loan limits below. A DSCR loan skips the returns and the cap in exchange for higher pricing and, on most programs, a prepayment penalty. Many investors use conventional for the first few doors and DSCR for the rest. If you also need a loan on your own home, see mortgages for self-employed borrowers.

Hard money lender CT and bridge loan CT: when short-term money is the tool

A hard money loan is short-term money secured by the property itself, usually six to twenty-four months, interest-only, with points up front and a cost well above a long-term mortgage. A bridge loan is the same idea with a different job: it covers the gap between buying one property and selling or refinancing another. Both are judged on the asset and your exit, not on rent or income. It is the right tool when:

• The property cannot qualify yet: vacant, needs work, no certificate of occupancy, or will not appraise until the renovation is done.
• You are buying to renovate and sell within a year, or you need to close in days against cash offers.
• You are buying before your current property sells and need its equity to close.

It is not the tool for a stabilized rental you plan to hold, because a DSCR loan is far cheaper over any period beyond a few months. It is not the tool without a clear, realistic exit, because short-term loans come due and extensions cost money. And it is not a consumer product: hard money is business-purpose financing, not a way around qualifying for the home you live in. The usual Connecticut sequence is buy with short-term money, renovate, rent, then refinance into a DSCR loan on the new value, often pulling cash back out. I arrange the takeout and can quote it before you buy; see refinancing in Connecticut for how cash-out works on a rental.

Connecticut specifics for investment property loans

Most of the DSCR loans I see are on two- to four-family houses in New Haven, Bridgeport, Hamden, West Haven and Waterbury, the small multi-family stock that was built for this. A few things come up on nearly every file.

• Older housing. Much of it predates 1978, so expect the appraiser to flag peeling paint and the insurer to ask about the roof, electrical and heating.
• Leases. Lenders want current leases and proof the rent is paid. Month-to-month is fine on most programs; an expired lease is treated at the lower of lease and market rent.
• Taxes. New Haven and Bridgeport mill rates run higher than the suburbs, and the tax bill sits inside the ratio, so a cheaper building in a high-tax town can carry a worse DSCR than a pricier one in a lower-tax town.
• Insurance. Milford, Stratford, Bridgeport and West Haven have flood zones along the Sound and the rivers. Get the quote before the appraisal.

To get started, send me the address or the kind of building you want, the rent roll or lease if you have one, and a rough picture of your credit and cash. Within a day I will tell you whether it fits a DSCR loan, a conventional investment property mortgage or a bridge, and what each needs. The loan programs page covers the alternatives.