DSCR Lender Question Sheet

Most DSCR lenders issue a term sheet rather than a Loan Estimate. A term sheet has no federally required format or delivery deadline, and its rate, fees and other terms can change before closing. That puts the burden of comparison on you.

Ask every lender the same seven questions, and get the answers in writing before you pay for an appraisal. Print this sheet and record what each one tells you.

1. Which DSCR formula do you use?

Ask which property expenses go into the calculation. The prevailing residential method divides gross rent by PITIA. Others use net operating income, or divide rent by principal and interest alone, which produces a higher ratio for the same property.

The same property can meet one lender's minimum and miss another's.

2. Which rent number will you underwrite?

For a leased property, ask whether the lender uses the executed lease, the appraiser's market rent conclusion, or the lower of the two. Most use the lower.

Ask what happens when Form 1007 supports less rent than the signed lease, whether there is a process for challenging a market rent conclusion, and who pays for that review. For a short-term rental, ask which proof of income the lender accepts.

3. What is the prepayment structure?

• Which schedule applies: 5-4-3-2-1, 3-2-1, a flat fee, one year, or none
• Whether the penalty is hard, applying to both a sale and a refinance, or soft, applying only to a refinance
• Whether the charge is calculated on the original loan amount or the remaining principal balance
• How much principal you may pay down each year without triggering it, commonly 20% of the original balance
• What removing the penalty entirely would add to the rate, commonly 0.25 to 0.50 percentage points

4. What are the reserve requirements, and what counts?

Ask how many months of PITIA the lender requires after closing, and which accounts qualify. Published requirements run from zero to twelve months.

Some lenders count only part of a retirement or business account, require the funds to stay liquid, or refuse gift funds for reserves.

5. What is your entity policy?

Ask before you form the LLC. Confirm whether the lender accepts single-member and multi-member entities, holding companies, layered ownership, series LLCs and out-of-state formations. Ask whether the borrower must be a special-purpose entity and whether title must vest in the LLC at closing.

Get the ownership threshold for a personal guarantee. Published cutoffs run from 20% to 51%, and that rule determines whose credit affects your pricing.

6. What is every fee, in dollars?

Ask for dollar figures, not percentages without a stated base.

• Origination and discount points
• Underwriting, processing and document preparation
• Appraisal and the rent schedule
• Credit report, per guarantor
• Entity or legal review
• Rate-lock extension, and what happens if the appraisal is delayed past the lock

7. Do you hold this loan or sell it?

A lender that sells the loan must satisfy the buyer's requirements, which can limit flexibility on an unusual property or ownership structure. A portfolio lender that keeps the loan may have more room.

Ask who will service the loan after closing, and whether servicing is likely to transfer. You will deal with the servicer far longer than the originator.

Recording three answers

Ask all three lenders about the same property, loan amount, LTV, rate-lock period, points and prepayment terms. If any of those change, you are no longer comparing the same loan.

Two warning signs

• The lender will not explain key terms before you pay for an appraisal. You should know how it calculates DSCR, which rental income it will use and how the prepayment penalty works before spending money on third-party reports.
• The lender advertises 10% down but cannot explain where the rest of the financing comes from. A legitimate structure may pair an 80% first mortgage with a seller-carried second. Both liens should be named and explained.