Guest Todd Robertson from Hometown Capital Group, a mortgage broker, discusses the Debt Service Coverage Ratio (DSCR) program allowing investors to buy investment properties. He explores scenarios, including multi-family options, and shares insights on rates, qualifications, and alternative financing solutions for aspiring real estate investors.
Brett
0:00:43 – Welcome back to another episode of It’s 5 O’Clock Somewhere Real Estate Podcast. My name is Brett Bernard with the Sam’s Real Estate Investment Division. Also, team members Jeff McNett, Jerry Zickmund is in the studio with us, and I’d like to welcome our newest member of the team, Nick Gibson. Nick has just become an agent. His license is gonna be coming to mail hopefully any day now. Nick, you can say hello if you want. Just yell.
Nick
0:01:07 – Happy to be here.
Brett
0:01:08 – There you go. Nick just lined up. Nick’s with Build 901. Known Nick for four or five years now. He’s a previous inspector with the fire department, so he’ll be a good fit to our team. So today we’ve got in studio with us Todd Robertson of Hometown Capital Group. He is a mortgage broker, and we talk a lot about our opinion on how you should be leveraging your cash and buying multiple properties instead of just putting all your cash into one property. So I brought Todd in today, because I wanted to just discuss different types of investor loans, what’s available to young guys, the kind of qualifications you may need, the amount of down payment you may need. Todd, welcome.
Todd
0:01:44 – Hey, thanks for having me.
Brett
0:01:46 – So Todd, we’re going to run a scenario. I’ve got a young guy out of California. He’s 29 years old, has 40 grand in the bank and wants to start buying real estate. Okay. As a mortgage broker, what would you recommend for that kit?
Todd
0:02:01 – Well, the most popular product that we have right now for investors is a DSCR program.
Brett
0:02:07 – Which stands for?
Todd
0:02:08 – Debt Service Coverage Ratio. What that means is that as long as the rent for the property that that particular buyer is looking at is going to cover the mortgage payment based on some limited qualifications, then that person would qualify.
Brett
0:02:22 – When you say limited qualifications, are they breathing? They’ve got a pulse? This isn’t 2008 all over again is it?
Todd
0:02:29 – No, they do have to have a few more qualifications than back then when it was the Wild Wild West. This program is going to require a minimum of 680 credit score, minimum 20% down. The property itself is going to have to pass an appraisal and inspection just like it would for any other financed property, but we’re not going to qualify the buyer off of their income. So we’re not looking at tax returns, we’re not looking at W-2s, we’re not looking at pay stubs. The only thing that’s going to be required is the assets and any reserve requirements that our approval may issue.
Brett
0:03:02 – So let’s say it’s a $100,000 house, they’ve got $40,000, they’re going to need $20,000 down, so it puts them in the category where they could buy two properties. What is the percentage of the rent that is considered income on that? Is it 100%, 80% of the rent? So if it’s $100,000 house rent for $1,100 a month.
Todd
0:03:20 – So different loan to values are going to have different what we call DSCR ratios. The standard is a 1% return.
Brett
0:03:29 – Okay.
Todd
0:03:30 – So if you’ve got a $1,000 mortgage payment, well then the rent’s gotta be $1,000 for it to qualify.
Brett
0:03:35 – And that $1,000 includes your full payment, taxes, PITI, insurance, everything.
Todd
0:03:41 – So if for any reason the property does not rent out for as much as the mortgage payment is, that means that that DSCR percentage is then going to be below what our standard 1% ratio is and we do have to make adjustments. The client would either have to put more money down and lower the loan to value. That’s normally all that can be done at that point in order to make it work. So they’re putting down 30 instead of 20. Right, or 25, you know. But your standard costs are going to run about 5%, so if you’ve got a 20% down payment, expect to have 25% to buy the house.
Brett
0:04:09 – Okay, got it. So with 40,000, roughly one and a half houses could be purchased. Correct. Unless we buy an 80,000 or we lower the price. Now, Jeff, just been with us long enough now to know, do we ever deal with properties under 1%? Never. Never. Every property we look at as always starts off at 1% or better. 12% gross, 1% a month. So in this case then the investor couldn’t buy two houses because he’s gonna need probably 45, 50,000.
Todd
0:04:38 – Correct. But if that same investor has a line of credit on their primary residence wherever that might be they can draw from that and use that money to cover the down payment and the closing cost. What if they don’t have a line of credit yet, but they could do one? Well, then they need to get a line of credit and then come talk to us. Is that something you can do? We do do lines of credit, yes.
Brett
0:04:57 – So you could take your current mortgage line of credit off your current mortgage. Is it based on equity of the property? Yes. Okay. Do they do a recent appraisal to try to figure out what that number is?
Todd
0:05:07 – So if a client was looking to get a HELOC with us, we pull what’s called an AVM report. We’re going to run some data reports to see what that value range is. Depending on what that value range is and what the loan to value is, along with credit score and other criteria, because on a home equity line of credit, you are traditionally qualifying with income. Pay stubs, W-2s, tax returns. It’s not like an investor loan. So the HELOC would be on a primary residence. It’s not something that’s offered for investors.
Brett
0:05:32 – That’s to raise cash for down payment of buying real estate.
Todd
0:05:34 – Yeah, to buy other properties.
Brett
0:05:36 – Okay. Do you deal with anything other than single family purchases? Do you do multi-family?
Todd
0:05:40 – I do do multi-family, and here just recently on the conventional side, two to four units can go all the way up to 95% loan to value. Really? So where you were capped at 75 and 85 just a few weeks ago, Fannie and Freddie will now let you buy a two to four unit complex with a 5% down payment.
Brett
0:05:57 – No doubt.
Todd
0:05:58 – Which is huge, especially in this market.
Brett
0:05:59 – Yeah, it’s huge. What’s the criteria for qualifying for that? I mean, credit score wise, income wise? I mean, obviously, that’s an income verification product.
Todd
0:06:09 – Correct. On these loans, you’re going to have to supply either pay stubs, W-2s, tax returns in order to qualify. Any properties that you own, you’ll have to have six months PITI and reserves for. But other than that, it’s just a standard qualified loan.
Brett
0:06:22 – I mean, if you can buy an investment property and you’re going to put 20% down, you can just put 5% down, pop some money in an account for your reserve account, cover all your bases.
Todd
0:06:31 – Well, on a two to four unit, that one of those units does have to be a primary. So let me backtrack. Oh, okay. So two to four units for investors is still going to require 20 or 25% down payment.
Brett
0:06:41 – Unless you occupy the property.
Todd
0:06:43 – But there’s a lot of investors that are looking to buy a four unit property and move into one and rent out the other three and then that other three units rent can be used to offset debt in order to qualify for that mortgage.
Brett
0:06:56 – Okay, gotcha. Yeah, most of our investors are out of town. Not sure any of them are going to move to Memphis.
Todd
0:07:01 – Yeah, this falls more in line of a local person looking to buy a four unit, use one to occupy and three to rent out.
Brett
0:07:08 – Right, got it. So, in your estimation, the easiest way to purchase for a new guy with some cash in the bank, a decent credit score, and a decent job is to do the DSCR loan.
Todd
0:07:16 – Correct.
Brett
0:07:17 – Okay. Are there any other products out there that investors are using that are kind of off the beaten path or different from the standard conventional DSCR loans?
Todd
0:07:27 – Yeah, we have some non-QM products where you can buy four or five properties at one time. You can do cross-collateralization depending on the certain scenarios. Those are gonna require at a minimum a 720 score and you’re gonna have to have investor experience. Right. Also do fix and flips for investors. So we’ll learn, we will loan up to 85% of the total rehab value on a property. Okay. We do a six month loan on that. So the client has six months to rehab the property and either flip it or at that point they’d have to refinance it and put it on a fixed rate.
Brett
0:08:01 – Yeah, did you ever get in touch with the guy I sent you yet?
Todd
0:08:03 – That would be a no. I got busy yesterday but he’s on the plan.
Brett
0:08:07 – He’s doing a lot of that. So yeah, we do have quite a few people. I have some investors and I just got a new builder that are buying and rehabbing, renting and flipping properties here in Memphis and they all meet the 1% rule or better. Jeff’s got a builder that’s fixing to start building brand new 4-2 construction rentals. We’ve got three other builders that are doing that for us now. You’ve you actually closed one or did one of the loans on it. Two actually. Yeah so we got a lot going on. So anyway I just want to bring in today because we’ve had people talk about DSCR loans. Some people think they’re complicated but they’re actually pretty simple.
Todd
0:08:40 – Man they are the easiest and simplest loans out there right now. People that are confused about them just don’t have the right understanding. Right. So anybody that’s listening to this, please reach out to me. Give me a call or apply online.
Brett
0:08:54 – What’s your number?
Todd
0:08:55 – 901-277-8124 or the easiest way is go to our website at 901mortgage.com and just click on the Apply Now button. Get started that way. It will get done instantly.
Brett
0:09:07 – Cool. So, to clarify, DSCR loans, we’re classifying rent as income, and used to, they would do that if you had a lease, but it was only like 80, 85% of the lease amount they’d classify as income.
Todd
0:09:20 – 75%.
Brett
0:09:21 – 75%.
Todd
0:09:22 – But yes, in the qualification scenario, let’s say someone’s buying a $100,000 property, they’re putting 20% down, the mortgage payment’s going to be $1,000. The rent itself also has to be $1,000 or more.
Brett
0:09:35 – So the loan-to-value is not that important, it’s just…
Todd
0:09:38 – Meeting that 1% DSCR requirement.
Brett
0:09:40 – Gotcha. So as long as your payment doesn’t exceed what the rent amount is, 1%, 12% a year, then it’s approved. And you got a 680 credit score.
Todd
0:09:50 – Well, 680 might require more than a 20% down payment. It just depends on the credit profile. Now if you’ve got investor history, you’ve got a good portfolio, there’s some exceptions that can be made, but standard with a 20% down, you’re going to need a 700. 680 would have to be a 25% down payment.
Brett
0:10:06 – Got it.
Todd
0:10:07 – Okay. But 680 is the minimum score requirement.
Brett
0:10:10 – All right. Understood. Anybody else got any questions?
Jeff
0:10:12 – What are the rates on these?
Todd
0:10:13 – So these rates are not like your conventional mortgage rates, not even Wall Street Prime. These are private investors that hold these loans. So, these loans are sold on a different market, but currently, I mean, what I’ve seen with the adjustments, what we call LLPAs, loan level pricing adjustments on the conventional mortgages for investment properties and even second homes, you’re only looking at maybe a quarter to a half a percent difference in interest rate on a DSCR loan opposed to a standard conventional investor loan. And if you’re qualifying a borrower without income and it’s only a quarter to a half a percent difference and that’s, in my opinion, irrelevant.
Brett
0:10:56 – It’s not a big deal.
Todd
0:10:57 – Yeah, that’s not a big deal at all because you’re looking at maybe 50 bucks a month on something like that.
Brett
0:11:01 – But there’s always a refinance option. You run the house for a year, you collect your income, you show it as a cash flowing asset and then you can always go back and refinance into a different type of a product and bring your interest rate down and increase your cash flow. That is correct. DSCR is an excellent way for young investors without a lot of capital, without a 800 credit score and a million dollars in the bank to actually get started buying rental properties.
Todd
0:11:25 – It’s also a great product for any current investor that has a portfolio of houses, might not even have loans on them, but might not also have the tax returns to support a standard conventional refinance where they can cash out, get up to 70% of that property’s value back in their pocket. They can use that money to go buy other properties. So it’s still a great refinance tool for other investors that currently have properties.
Brett
0:11:48 – Cool. Well, Todd, thanks for being here. Todd from Hometown Capital Group. Your number again?
Todd
0:11:53 – 901-277-8124.
Brett
0:11:56 – All right, buddy. Appreciate it. Thank you, man.
Todd
0:11:58 – All right Thanks for having me.