DSCR Loans Explained: Skip the Debt-to-Income Ratio w/ Eric Bernstein

Most banks will deny you for a mortgage even if you're pulling in six figures because they don't know how to read your income if you're an investor, self-employed, or getting paid in RSUs instead of a W-2. In this episode, you'll learn why DSCR loans don't even look at your debt to income. How non-QM lending is finally catching up to how investors and freelancers actually getting paid and exactly what documents to have ready before you even apply. Eric Bernstein from LendFriendMTG.com breaks it all down. He spent the last 10 years helping investors get approved when the big bands say no.

stick around and check the link in the show notes if you want to reach out to his team directly. Let's get started. Fucking Eric Bernstein joins me here today and you can learn what he can help you with by heading over to lend friend mtg.com that's going to be a clickable link in the show notes. But if you can figure out the domain is what we're going to be talking about. We're going to be talking about lending mortgages and the like especially associated with

your real estate investing. I really appreciate your time here today here. Sure, thanks Jack, appreciate you having me as a guest. It seems like when I'm talking to financial guys, typically they fall into the accidental occupation. Like, how did you how did you find your way into this? Yeah, accidental is a good way to put it. I was working in the insurance space in 2015 and randomly met someone at the gym that

asked me a bunch of questions about my career, about what I was trying to accomplish, and I was always interested in a real estate or real estate adjacent industry. And so, you know, conversation went well. He recruited me to join his mortgage operation and the rest was history. So joined mortgage industry in 2015. So can't believe it, but this is my 10th plus year in the industry. Well, we're going to kind of dive into like some nitty gritty on some things. one of those is the term non-QM lending.

Could you kind of break down what that is? it's kind of becoming a little bit more prevalent or in people's vernacular lately. So maybe we better break some of this down. Sure, yeah. Non-QM stands for non-qualified mortgage. It's basically the easiest way to think about it is everything that doesn't fit in the box of a conventional or conforming loan, everything that's outside of that box, we'll look at as a non-QM mortgage, right?

Other terms, vernacular, portfolio loans, or exception-based lending, it's all one and the same, right? It's been a sector of the industry that's growing really quickly, and the easiest way to really think about it is. With non QM, it's like basically everything that's not a just straightforward W2 or very clean, self-employed borrower. There's going to be a lot of good non QM or portfolio options for those types of folks. Non QM is basically like, it's not a workaround for risky borrowers by means.

It's the mortgage industry finally catching up to how Americans in general are earning money, right? Especially post COVID, the gig economy. more of us being freelancers, more of us being real estate investors. So non QM is more so like the mortgage industry catching up to how Americans currently earn. That's really a big difference there then because I even remember early on in our real estate investing, where it was pretty important for us to show that that standard W two

and to get anything done. Absolutely, yeah. Look, there's always going to be a nice box for those clean and easy W2 earners, but the reality of the situation is... The other sector of the economy has seen explosive growth. And so the non QM space is basically, again, the mortgage industry catching up and providing solutions to people that want to own real estate, that want to own homes, and giving them an easy and relatively straightforward path to getting there.

Could you talk a little bit about what ducks we need to have in a row in order to take advantage of some of this? know that we're talking about the economy landscape has definitely changed and has caused the banking industry to consider outside of their box. But I'm sure there's some things that could make the process a lot smoother. Yeah, just like any other loan, right? We want to make sure we have our documentation. well in line and basically when it comes to earning income, regardless of how we're

earning that income, just make sure it's well documented and well sourced. So some of the more typical programs on non-QM, some of the more used programs are bank statement loans, right, or 1099 loans. We're not necessarily gonna look at your tax returns because the best way to think about it with tax returns is if you're responsibly filing your taxes as a self-employed borrower, you're trying to mitigate taxes and you're trying to write off as much as you can to shield as much income as you can.

So a lot of the times those folks end up putting themselves where they don't qualify for a traditional mortgage. That's where something like a bank statement loan would come in, provide a straightforward path for somebody to get a mortgage approval. So in that instance, right, we would document 12 or 24 months of business bank statements or personal bank statements. And so we want to make sure that, you know, those those deposits are consistent or coming from sources that are, you know, obviously

income. so, and then another big sector of non QM that's really growing rapidly is asset depletion or asset dissipation loans. Same type of thing. We're just going to look at three to four months worth of your statements and prove your ability to repay the mortgage based on your liquid asset. having clean, ready, accessible statements, whether it's your asset statements or your bank statements, that's going to be one of the more meaningful things that consumers can

do to get ready to apply for these types of loans. Thanks Well, you've mentioned a few scenarios already. You mentioned whether it's just a mortgage on a single family home, maybe it's a rental property, or it's even a portfolio loan. Could you talk a little bit about what is the most common investor situation that you're seeing, and what is the best fit for these type of loans? Yeah.

Absolutely. So the most common investor program right now, which again has has really taken off since post-COVID lending, has been DSCR loans, right? So debt service coverage ratio loans, where really the way that the investor wants to think about it is we're not really underwriting the person, right? The lender is more underwriting the real estate and the ability for the home to generate income to cover the minimum obligations being principal interest, taxes, insurance, an HOA if there's HOA included.

That's going to be the most popular program right now. It's very straightforward. We do have programs that allow even first-time home buyers to utilize this program. And for DSER, the most important thing is going to be that debt servicing ratio. So the ratio that lenders are looking for is one to one, meaning the expenses equal the projected income on a 12-month lease. you have a positive ratio, meaning more rent than expenses, that's going to be a clean and easy approval.

We can actually now do no-ratio loans, and the way that the lender mitigates the risk on a lot of these types of loans is they're going to hit the interest rate to make an exception. But yeah, the stronger the ratio, the better the terms the investor's going to get there. That's probably, again, the most easily accessible lease documentation program that's available strictly for investors. Hmm. Yeah, I'd hope that everybody's at least at a one for one ratio when underwriting a rental

property anyway. it's It's okay. So think of it this way, right? We just did a deal out in the Panhandle of Florida. The 12 month ratio on a 12 month lease, the ratio was sub one because right, the property to maintain costs, it was 35, $3,600 a month. 12 month rent was 2,800.

But we use their DNA and we showed that the short term rental potential of this home was generating $4,500 a month, right? There are exceptions, especially if the consumer is gonna take it on as a short-term rental or Airbnb VBRO, that again, we can make exceptions and it does make sense, but yes, ideally in a perfect world to get the best terms, we wanna see that one-to-one ratio. So is it fair to say then you're lending on the potential of the property, not necessarily what is actually happened, like historical? yes, we can lend on the potential for sure.

Again, that's usually going to come with a price adjustment. I know one or two lenders out there that actually have no pricing adjustment to do that. But most of time we are lending based on the reality and what's actually going on. And the way that we verify that is we send an appraiser out and they give us fair market rent. And so they confirm the ratio on these properties based on a 12-month lease typically. So what type of skin in the game does the investor have to come with? Or what does the loan structure typically look like?

Yeah, great question. And it depends on the market, but as a blanket rule of thumb, typically the investor is going to have to do 20 or 25 % to get that ratio to work. Right. If you do 10 or 15 % down, which some of these programs allow, getting a one-to-one ratio is really, really difficult, right? Unless it's in a really high-end performing market, top performing market, that's not usually going to be the case.

And so usually to make the numbers work, the investor is going to have to come with 20, to 40 % to make the DSUR loan work. As an average, we see like most investors come to the table with 25 % down on this program. Okay, yeah, it makes a lot of sense. And then like, what is the typical duration? It's, well, that's a great question. 30-year fixed is really still the gold standard, but we do have I.O.

options on this, which are really popular to drive that payment lower. So you can take a 10-year interest-only portion and then have the payments due over 20 or over 30, and then you can extend this term as long as 40 years out with, a 10-year I.O. option. Yeah, like you kind of gave that example of Florida, but could you kind of give us or paint some additional examples? think that people want to we learn the best if we have some examples of maybe some other projects that you've you've worked through.

Absolutely, another example in short term rent, we just did a deal outside of Nashville, same type of scenario, right? The one to one ratio didn't work. We have an investor that doesn't hit the rate if you decide to. get a air DNA and be able to prove short-term viability. So same type of thing, we were just trying to prove roughly, was very close to where a lot of tours visit in Nashville. And so the rent, were below because the sales price was high, we were pushing a million

dollar sales price. so to, even with the 20 % down, to be able to have a one-to-one ratio was difficult on the 12 month look. But once we added the air DNA, It was basically showing that you can make double or triple in some of these months. And so it was an easy approval after that. go to a different type of market where rents are relatively strong and stable. So a lot of markets in California where you still have high sales prices, but you have

very high rent as well. We do a lot of deals out there that have no issue on. ratio right those those have no problem meeting one-to-one and then you get the all you know the in-betweeners So we're doing a deal in West Texas the borrower got denied by a few lenders Because they were you know trying to do as a conventional loan Just as an investment property. They couldn't qualify for DTI. They came over to us We were able to close it in you know in 20 days using a DSCR loan the

rents out there are the price prices are very low and the rents are strong and stable. And so again, that's another just an easy example where it might be well suited for DSER. They ended up getting a better rate on DSER than they would have on conventional, which again is not always the case, but sometimes is the case depending on the strength of the consumer and the strength of the ratio here. Because that one ended up coming in at 1.25, which is another kind of tier. Once you clear 1.25, you have access to better interest rates, better terms there.

It sounds like you've been able to do some magic. You've mentioned in one scenario there where they didn't qualify under a different program. If you find that somebody doesn't qualify, what typically happens there? What's the biggest mistake investors make that might prevent it? yeah, so the biggest thing with investors, especially if you're racking up two, three, four, five, six properties, is it starts to weigh down on your DTI. So first of all, you wanna make sure you're working with a lender that understands

investors intimately, right? And so a lot of the times, if you go to a corner bank or you go to some of these online lenders, they're not gonna use your... the rental property income unless it's claimed on your taxes, right? So easy example, if I'm an investor in the last 12, 24 months, I picked up five investments. Those aren't necessarily on my schedule E yet, right? Because I haven't filed my taxes.

So if I go to apply with like Chase or Wells Fargo or Bank of America, they're gonna look at it and say, well, you have all this liability and we can't offset it because you haven't claimed this on your taxes yet, right? We're talking about conventional guidelines. You go to a broker or lender like us, We understand this issue and we have lenders that will allow us to use the rent to offset that the cost of that of that property on our DTI So that's just easy easy stuff that we see all the time where somebody comes denied by you know rocket mortgage because the you

know the loan officer didn't necessarily Understand what they were looking at or Bank of America because you know, that's their guidelines. They can't use those That that rental income so that's easy example unconventional and then once you start again racking up a lot of property You can only have 10 conventional loans under your name as a real estate investor. And so that's where we pick up a lot of clients and it's easy to move them over to DSCR. twofold, right? The number of properties and then your debt to income.

DSCR becomes really easy because we don't look at your debt to income. There is no debt to income ratio on a DSCR loan. We don't look at your income docs whatsoever. Again, like we talked about earlier, we're underwriting to property performance more than anything. just to remind everybody we're talking to Eric and he is with lend friend mtg.com that's going to be a clickable link in the show notes I understand that there's quite a bit of information and training there so take advantage of that if you found some value in what

we're chatting about so far do us a favor share this with one of your investor friends if you're watching us on YouTube give us a like and subscribe So Eric, you mentioned, you know, you're underwriting the property, but is there any insight or any any taking into account that person's credit history? Like, I'm sure some people are asking about going to think about that. Yeah, so I always tell investors, right, there's two things that we're really looking at, right? Credit, ability to repay just based on your credit report, right?

So late payments, not something we wanna see. We wanna see a high credit score, we wanna see all your payments on time. Typically on these DSCR loans, you want a minimum of 680 FICO, but really we wanna see 700 plus in most instances. So we are heavily waiting and looking at the credit. score most importantly, right? Again, we're not looking at your liabilities, factoring them into a debt to income ratio, but we are looking at how you are, how you handle your debts, how you handle your

liabilities. A lot of these programs require you to at least have a mortgage, right? And if not, you can provide 12 months proof of rental history just for yourself, but you're gonna get softer terms if you're not a first-time homebuyer. on DSCR. So we are looking at your credit score and then again the second most important numbers when it comes to these deals are your credit score and that ratio we already discussed. You kind of touched on this before, but could you also cover what documentation somebody

should have ready when they approach your team? Are you asking specifically for the DSER loans? Yeah, well, for... I just think that sometimes people come into you blind, and then now you're coaching them along the way as to all of the documentation they have. So if they have it ready as a packet, maybe things would expedite some things. Okay, yeah, absolutely. So on DSUR specifically, we want to make sure that if you have other properties, you have

an organized folder with all of your REO docs, your real estate-owned documents, right? So that's most recent tax bills, most recent HOA statement, and your insurance declaration or your insurance policy. You'd be surprised how many people don't have easy access to this information, and it takes them a while to go into each portal and pull everything down. So if you're out there and you're an investor, just having easy access to those documents, especially on these DSCR loans because we are looking at at least one or two of your other properties to prove history

and performance. Having that stuff readily available is super important. Credit and all that type of stuff, most lenders and brokers are going to pull their own credit reports, so you don't have to worry about that. And then in general, for the other portfolio non-QM loans, just having, again, access to your statements and having those organized is key because a lot of these programs require 12 or 24 months of those bank statements. And if you're using an asset depletion loan, you want to make sure you have terms of

agreement with all your banks. So again, super easy to pull down online. And then making sure that you have three to four months of your most recent statements ready to submit to the lender. If you're looking at 1099 programs and all that type of stuff, then you just want to make sure you have those documents, again, readily available. So 1099 loans, you want to make sure you have two, three year history. then key, whether you're a real estate investor or you're self-employed, having quick and

easy access to your CPA. is crucial, right? So having a good CPA is probably some of the best advice that we give. If you're well aligned with your CPA and you're having high level conversations about here's my tax strategy, I wanna make sure that I'm writing things off and shielding as much income as I can and reducing my tax liability, the other side of the coin with your CPA is typically, hey, I'm gonna continue to buy these investments, so I need you to be readily available and accessible to my mortgage lender, and that's gonna be, again,

crucial for our process, crucial for a clean approval, because a lot of these portfolio loans or non-QM loans require CPA letters, which is a way that we mitigate risk as the lenders. So you're kind of painting a really nice picture regarding some of this. What are the tradeoffs compared to a conventional mortgage? Give us the downfalls here, or some of the reasons why this might not be the best approach. Yeah, it just comes down to interest rates in terms, right?

Non QM loans are typically going to be 75 basis points to a full point higher on interest rate compared to conventional or jumbo loans. Most of the time when our clients find us online, they've been denied by, you know, one to three lenders and they're starting to look for alternative solutions, right? Or we get referred by the CPA or by their realtor and their boots on the ground listening to their clients and the client saying, a really hard time purchasing a home. now again, working with the right team, the right professional that understands these

types of loans, that's key. We've already discussed that. And so just, yeah, making sure that... you're in a position to just be quick about it and that will allow us as a professional to present these terms quickly to you guys, to the clients, to the real estate investors. That's usually gonna lead to a lot of success. I don't ever wanna make it sound like it's too good to be true or it's very easy. These loans are streamlined because they are specific for specific people that are looking

for very specific solutions, right? So they are easy if you fit in the box, but I don't to oversimplify them, the biggest hang up comes on the terms. And so most people will fight tooth and nail to try to fit in the box of jumbo or conventional before they realize, hey, there's a way easier solution. look, the way that I always present it to the client is you're doing these things on your accounting and you're taking this approach with your business for a reason. That's to save a lot of money on taxes, right?

To pay a half point or a full point higher on interest rate for your mortgage, if you just simply do the math, you're paying a lot less on just the increased interest rate compared to how much you could be paying if you filed your taxes and reclaiming all this income. Well, do you have like a particular service area or is it across the United States? We are licensed in 16 states now, about to be 17. We cover 70%, I believe, of the population. So we have the major states out there.

We're adding states all the time, depending on just demand and inquiries that we get online. So yeah, we cover the majority of the big states out there, East Coast, West Coast, Central. But yeah, unfortunately, we're not 50 states just yet. Sure. So you mentioned what's the 17th straight state? What are you adding right now?

Okay. Yeah, hopefully we get that any day. So you also mentioned like a portfolio loan. Could you talk a little bit about that and where that might benefit people? I know that a lot of people that listen to these type of shows, that's more of an aspiration, you know, that they could talk about portfolio loans. But at what point should somebody consider that type of traction? Well, the portfolio loans, right, it really comes down to investor appetite, right?

Because definition of portfolio is just, it's an exception to the exception, right? Does a lender want to take the inherent risk of a deal, look at it underwrite, like just individually, and then hold that loan in their portfolio, and then service that loan directly. And just, so it really comes down to, again, working with the right professionals that can present to multiple institutions So if you've been denied a few times but you're very high caliber client and you believe in your finances and your situation, you should approach somebody

like us or a high level broker that might have the right connections to offer a solution on a portfolio. And I'll give an easy example that we're closing right now in the middle of this interview. The guy should be at the closing table. This is a gentleman. He's one of the higher execs at SpaceX. They're relocating him from Washington to Texas.

He's going to be the second highest ranked in Texas and believe it or not his comp package because it's all RSUs the majority of it is RSUs most banks you know Bank of America and and three or four other banks denied this gentleman to buy a three three and a half million dollar house out here in Austin Texas. He found us online through ChatGPT he called us and I said this is very unique right they're pre IPO so his RSUs are in a private company so to most lenders It's a huge no-go. They're gonna say, hey, we can't qualify you on that income.

We can only use your base salary. And that's how he ended up with a bunch of denials. He comes to us. I look at it and I tell him, look, I've done these types of deals in the past, but it's a portfolio basis. It would be a portfolio loan if I can get anybody to bite on it. We took him to a credit union here in Texas that has an appetite for these types of loans and that will accept portfolio loans.

They'll keep it. They'll service it. they might hit the interest rate, but they did it on a jumbo loan. They approved him and they allowed him to borrow up to 95 % loan to value on a jumbo loan, which is insane. And they give him the same exact interest rate that they would one of their premier clients. So he's closing right now on a six and an eighth.

five-year arm on jumbo. So that's just a really good example of somebody that has, you know, look, he makes hundreds of thousands of dollars a year, half a million dollars a year easy at SpaceX. He's been there for several years. That's a no-brainer. For him, it was more so finding the right level of professional that can bring him that solution. And so if you're out there searching for a very unique solution, again, the best advice

that I can give is find the right professional. Don't go to Rocket Mortgage, right? Don't go to SoFi. Don't go to your corner bank. They're just not equipped to handle that type of situation. Well, Eric, this has been a really interesting conversation. Before we dive in and start closing out this episode, is there anything else I might have

missed, anything else we should have tried to hit on? No. I think the questions have been great. think just, you know, the biggest thing that we try to promote out there is education. Education of this space is what leads to more people discovering it, more people using these programs to purchase. We've seen an explosion in this market, right? The majority of the growth in the mortgage industry has been non-QM loans.

I think one thing that's important again is the education, but the reality is is eventually Fannie and Freddie are going to catch up, right? The way that non-QMTB looked at it is it's like the incubation space or like the R &D portion of the mortgage industry. Substantial changes haven't been made by Fannie and Freddie on how to qualify a borrower in. decades. So like we talked about at the beginning of this interview, most of us are earning money

in different ways than people could have imagined 30 years ago. So if you're out there and you're listening to this or you have friends, family that are going through this where the mortgage process feels overly difficult, the best piece of advice is get online, do some research, talk to AI, try to find the local professionals in your area. that can help you through this process because most of the time there are solutions. I can't tell you how many people I talk to every day, every week, every month that are like, my God, thank God that ChatGPT or my realtor or my builder put you in touch because

they were at a dead end with their current lenders. Well, if you're ready, Eric will dive into the rapid fire. But before we do, I want to remind everybody it is LendFriendMTG.com. That's going to be a clickable link in the show notes, but we'll jump into the rapid fire and close out this episode. What lie do real estate investors often tell themselves? that they're getting a good deal. If you could go back in time and give your younger self a piece of advice, what would it

be? Just do better riding the waves, right? Up and down. think anyone who's in real estate understands that it's cyclical, right? It's the nature of the beast. And so whether you're professionals or you're investors that work in the space is like, you know, ride the waves, enjoy the ups and the downs, right? I always tell young people that are joining this space, like, hey, if you don't have a

stomach for ups and downs and volatility and you don't enjoy the actual journey, there's probably a better industry that can provide more stability and less volatility. that will lead to less heartache and headache for those that aren't equipped for it. What is one thing in your job or your current role that you wish you could either automate or just delegate to somebody else? Mm-hmm. Yeah, that's a that's a fascinating question because we're really working heavy with AI these days on our side And we've done a lot of automation I would just say that the

opposite right the one part that I never want to automate is this right the human connection element of this industry Being able to help people and mentor people even our own clients is really the the best part of this job I think that you've seen an over automation right if you go to better comm you go to some of these Lenders like they're using AI for so much and there's so much that's automated where most of the time especially if you're buying a million, two million, three million, five million dollar house, all you want to do is get on the phone and talk to someone that is responsible, that's responsive, and is a

professional that is an expert in their space. And so we automate as much as we can, but I think there's been an overcorrection. What single tool or process have you implemented that has had the biggest time-saving impact? Yeah, that's another fascinating question. So we work... very heavily in this non QM space, right? And so the non QM, as we've just discussed for the last 30 minutes, everything is a

one-off, right? Everything is an exception. And so we've created a native AI here at our company that looks at every individual very quickly and underwrites the file based on non QM guidelines. And that has saved us tremendously. It saves us hours and hours on every file for AI to do the first pass through it and make suggestions to rather than us having to review every document.

So that's been tremendous for us and we're excited about where that's going, Well, I really appreciate your time here, Eric. Again, is LendFriendMTG.com. Clickable link in the show notes, but we'll hope you'll consider coming back again sometime. It was great to meet you, and it was a great chat. Thanks. Thanks, Jack.

Really appreciate it.