For DSCR Loan refinances, the lender must verify the most recent payment history on the subject property’s current mortgage loan, unless the refinance is a cash-out refinance on an unencumbered property (one with no existing debt). To be eligible for a DSCR Loan refinance, the current debt must be current (no delinquency) and must not be matured.
While late payments on any real estate loan (i.e. mortgage loan) are closely scrutinized for every guarantor, late payments on the property being refinanced are even more critical. A recent delinquency on the subject property is a clear red flag for DSCR Lenders, often leading to outright disqualification or, at best, sharply worse loan terms, such as higher interest rates and reduced maximum LTV.
Mortgage payment history is usually pulled from the standard credit reports ordered early in the process. However, many DSCR refinances involve properties held in entities like LLCs These mortgages often do not appear on an individual’s credit report, and indeed, this lack of personal credit reporting is one of the reasons many real estate investors prefer DSCR Loans to alternatives when financing rental properties.
In those cases, the lender will require additional documentation to confirm performance, typically called a 12-Month Mortgage History. Note that for short-time period refinances with less than 12 months ownership, such as many BRRRR Strategy projects, just a comprehensive mortgage history is required and would fully satisfy this requirement, there is no requirement for a “full 12 month” for DSCR Loans, as properties with loans outstanding for less than a year are typically fully eligible and okay with DSCR Lenders. However, it’s important to note that if the loan has less than 12 months of elapsed term, but the property was encumbered by a different loan prior to the current loan in the last 12 months, then the mortgage history for the prior loan’s activity in the preceding 12 months is required as well. This is to prevent the borrower from hiding a previous credit issue on a refinanced loan that wouldn’t show up if just the most recent “clean” loan’s history is required.
When mortgage history isn’t on the credit report and must be independently confirmed, this is obtained via what is called a Verification of Mortgage (“VOM”) document. A VOM is a written verification from the current servicer showing the loan’s balance, monthly payment and detailed payment history (including any lates) for the most recent 12 months. Another important nuance is that while a DSCR Lender only considers any payment made 30 or more days after the due date as an official “late payment” (even in cases where a late fee is applied), some VOM documents will not have necessary detail on late payments and late fees applied that specifically note if it was a 30+ day late or a late payment that was made within 30 days due. While most servicers and document providers understand the importance of this detail and will include it on reports, some will not, and in these cases, especially when any late payments were made within 30 days of the due date, it’s critical to ensure this detail is properly noted on the documentation provided to the DSCR Lender.
The subject property mortgage history requirement can be satisfied in multiple ways, as DSCR Loan refinances can involve many different types of existing loans, including conventional or other non-QM loans (such as DSCR loans), hard money loans or even private money loans from individual lenders. Because of this variety, DSCR Lenders will generally be flexible on the type of documentation accepted, provided it is legitimate, independently verifiable and covers all recent payment history up to 12 months.
If the property is owned and indebted in the name of an individual guarantor on the new loan, mortgage history can often be verified directly from the credit report, and further documentation isn’t likely needed. When a Verification of Mortgage (VOM) is needed, the DSCR Lender will typically have a standard form sent to the current lender or servicer, completed by them to confirm: current principal balance, monthly payment amount, payment status, dates for the most recent 12 months, and any late payments or delinquencies. DSCR Lenders typically have internal controls to ensure the VOM is signed and returned by the actual lender/servicer, not just produced by the borrower, as a core fraud prevention measure.
When mortgage debt does not appear on a credit report and a VOM is unavailable or delayed (a commonly notorious issue with servicers and private money lenders), DSCR Lenders may accept alternative documentation. This can include 12 months of lender-issued payment statements supported by verifiable payment evidence such as bank statements or canceled checks. While this means more paperwork for the borrower, this method can be faster in cases where obtaining a VOM would delay the file, since the borrower controls the collection of this documentation.
With the continuing rise of the popularity of the BRRRR Method and the practice of utilizing DSCR Loans for the refinance aspect of this strategy (Buy -> Rehab -> Rent -> Refinance -> Repeat), it has become increasingly common for DSCR refinance loans used to payoff hard money loans for the purchase and rehab of fixer-upper properties. Hard Money loans for these BRRRR strategy projects are typically pretty short – generally six to nine months in term – and with rehab projects often taking longer than anticipated, it has become a common issue where borrowers must race against the clock to get the DSCR Loan closed for the refinance prior to the existing hard money loan maturing and entering default.
While DSCR Loans are still possible with a late mortgage payment or two, these typically come with much higher rates and restrictions and can ruin the deal returns easily even if qualification is maintained. Additionally, borrowers generally cannot get DSCR Loans on a refinance of a non-current or matured hard money loan. For these reasons, it’s critical that there is a clean mortgage history documentation for DSCR Loans to work well on BRRRR refinances.
In cases where there are fast-approaching maturities, it may be necessary to get updated VOMs showing any extensions or agreed-upon interest arrangements that ensure that the hard money loan being refinanced remains out of default when the refinance closes.
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