Can I Get a DSCR Loan if a Property Is Not Fully Rented?
Yes, you can absolutely secure a Debt Service Coverage Ratio (DSCR) loan for a multi-family property with one or more vacant units. This is a common scenario for real estate investors, especially in competitive markets like California. Investors often purchase properties with the intent to renovate a vacant unit, place a new tenant at a higher rent, or take time to find the right occupant.
DSCR loans are asset-based, meaning the lender's primary focus is the property's ability to generate income to cover its mortgage debt. They are less concerned with your personal income and more interested in the property's cash flow potential. Because of this, underwriters have a standardized process for evaluating properties that are not 100% occupied. They don't just look at the current rent roll; they analyze the projected rental income for the entire property to make their lending decision.
This is a critical distinction from conventional loans, which might struggle to approve financing on a property with incomplete rental income. For a DSCR lender, a vacant unit represents opportunity, and they have the tools to quantify that opportunity for loan qualification.
How Lenders Calculate Income for a Vacant Unit in Los Angeles
When you apply for a DSCR loan on a partially vacant duplex in Los Angeles, the lender won’t guess what the empty unit could rent for. They rely on a professional, third-party assessment to determine a fair market rent. This process removes subjectivity and provides the underwriter with a reliable income figure to use in their calculations.
The Role of the Fannie Mae Form 1007
The key to this process is the market rent analysis completed by a licensed appraiser. For single-family investment properties, this is done using the Single-Family Comparable Rent Schedule, also known as Fannie Mae Form 1007. For 2-4 unit properties like a duplex, this same analysis is integrated directly into the main appraisal report.
The appraiser's job is to find several similar rental properties in the immediate vicinity of your subject property that have been recently leased. They analyze these 'comparables' based on location, size, condition, and amenities to establish a credible market rent for your vacant unit. This is not a Zillow estimate; it's a data-backed opinion of value that underwriters trust.
Example Calculation for a Los Angeles Duplex
Let's imagine you're buying a duplex in the Echo Park neighborhood of Los Angeles. The property has two identical units.
- Unit A (Occupied): The current tenant has been there for three years and pays $2,900 per month.
- Unit B (Vacant): This unit is empty, perhaps because the previous tenant just moved out or the seller is preparing it for sale.
The lender orders an appraisal. The appraiser inspects the property and completes the required market rent analysis. They find three comparable recently rented 2-bedroom units in Echo Park, adjusting for minor differences. Based on this analysis, they determine the fair market rent for Unit B is $3,400 per month.
For the DSCR calculation, the lender will use a total gross monthly income of: $2,900 (Unit A) + $3,400 (Unit B) = $6,300
This projected total is the figure used to determine if the property's cash flow can support the mortgage payment.
What Kind of Rent Appraisal Is Needed for a Long Beach Property?
Whether your investment property is in Los Angeles, Long Beach, or anywhere else in California, the required appraisal process is the same. For a 2-4 unit property, the lender will require a full appraisal that includes an analysis of market rent for all units.
For a duplex in Long Beach, the appraiser would complete the Small Residential Income Property Appraisal Report (Form 1025). A crucial part of this report is the 'Comparable Rental Data' section, which serves the purpose of establishing market rent. The appraiser must provide detailed information on comparable rental units to justify the market rent used for both the occupied and vacant units.
It's essential that the appraiser has deep knowledge of the local Long Beach submarkets. An appraiser cannot use a rental in the Naples area as a comparable for a property in Bixby Knolls. The comparables must be geographically close and functionally similar to provide an accurate and defensible rent value that will satisfy the loan underwriter.
Does the Loan-to-Value Change for a Partially Occupied Duplex?
Generally, the loan-to-value (LTV) ratio for a DSCR loan is not directly impacted by a property's occupancy status at the time of purchase. The LTV is calculated based on the property's appraised value, not its current cash flow. Most DSCR programs allow investors to borrow up to 75-80% of the property's purchase price or appraised value, whichever is lower. The data, information, or policy mentioned here may vary over time.
However, a vacant unit can be perceived as a slightly higher risk by some lenders. While it may not change the LTV, it could influence other aspects of the loan offer:
- Interest Rate: A lender might offer a slightly higher interest rate to compensate for the perceived risk of a 'lease-up' period.
- Reserve Requirements: The lender may require you to have more liquid assets in reserves (more on this below).
A strong projected DSCR based on the appraiser's market rent analysis can significantly mitigate this perceived risk. If the numbers show the property will easily cover its debt once fully occupied, the lender is more likely to offer their most competitive terms.
Can I Use a DSCR Loan to House-Hack a Multi-Family Home?
This is a frequently asked question, and the answer is a firm no. DSCR loans are specifically designed for non-owner-occupied investment properties. During the loan process, you will be required to sign documents, including the loan application and an occupancy affidavit, certifying that you do not intend to live in the property as your primary residence.
Living in one of the units while renting out the others is known as 'house-hacking'. While it is an excellent real estate strategy, it requires a different type of financing. Owner-occupied mortgages, such as FHA, VA, or conventional loans, are designed for this purpose and often come with more favorable terms like lower down payments and interest rates.
Misrepresenting your occupancy intent on a loan application is considered mortgage fraud, which has severe legal and financial consequences. If your goal is to house-hack, you should pursue an owner-occupied loan product.
Reserve Requirements for This Type of Investor Loan
Lenders require borrowers to have 'reserves', which are liquid funds available after closing to cover mortgage payments during unexpected vacancies or repairs. For DSCR loans, the standard requirement is typically 3 to 6 months of the full monthly mortgage payment, which includes principal, interest, taxes, and insurance (PITI). The data, information, or policy mentioned here may vary over time.
When purchasing a property with a vacant unit, the lender will likely require reserves on the higher end of that range, such as a full 6 months of PITI. This gives them confidence that you can manage the mortgage payments while you search for a qualified tenant for the empty unit.
Calculating Reserves for a Partially Vacant Property
Let’s say you are buying a duplex in Long Beach with a total estimated monthly PITI of $5,200.
- Lender's Reserve Requirement: 6 months
- Total Reserves Needed: 6 x $5,200 = $31,200
This $31,200 must be in a liquid account, such as a checking, savings, or non-retirement investment account. The funds must be sourced and seasoned, meaning the lender needs to verify where they came from.
Will Future Rent From the Vacant Unit Satisfy the DSCR Ratio?
Yes, the entire model of DSCR lending for partially vacant properties is built on using projected future rent. The lender uses the gross rent figure from the appraiser's report to qualify the loan.
The DSCR formula is:
DSCR = Gross Rental Income / Monthly PITI
Most lenders require a DSCR of at least 1.15 to 1.25, though some programs go as low as 1.0. The data, information, or policy mentioned here may vary over time. A ratio above 1.0 means the property generates more income than it costs to hold.
Putting It All Together: DSCR Calculation in Los Angeles
Let's return to our Echo Park duplex example:
- Gross Projected Monthly Rent: $6,300 (from Unit A's actual rent and Unit B's appraised market rent)
- Estimated Monthly PITI: $5,100
Now, we calculate the DSCR:
DSCR = $6,300 / $5,100 = 1.235
Since 1.235 is greater than the typical minimum requirement of 1.15, this loan would likely be approved based on its DSCR. The projected rent from the vacant unit was essential to making this calculation work.
What Documentation Proves Market Rent to an Underwriter?
The underwriter is the final decision-maker, and they rely on specific, official documents to verify the property's income potential. Your personal opinion or a rental listing you found online will not suffice. The key documents are:
- The Full Appraisal Report: This comprehensive report (Form 1025 for 2-4 unit properties) provides the property's value and overall condition.
- The Comparable Rent Schedule: For a 2-4 unit property, this analysis is part of the Form 1025 appraisal. For a single-family home, this is a separate document (Form 1007). It is the appraiser's official, data-driven analysis of the unit's market rent.
- The Executed Lease Agreement: For the already occupied unit, a copy of the current lease proves the existing income stream.
The underwriter gives significant weight to the independent appraiser's findings. A well-documented and professionally prepared rental schedule is the cornerstone of getting a DSCR loan approved for a property with a vacant unit. Understanding how lenders view vacant units is key to successfully financing your next investment property. If you're looking at a duplex in Los Angeles or have questions about a specific scenario, having an expert guide you through the DSCR loan process can make all the difference.
Ready to see how your investment property's potential translates into a real loan approval? Our team specializes in navigating the nuances of DSCR financing for properties with vacant units. Apply now to get a clear assessment of your options.
Author Bio
David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.
References
Fannie Mae - Form 1007, Single-Family Comparable Rent Schedule
Consumer Financial Protection Bureau (CFPB) - What is an appraisal?
