For acquisition DSCR Loans, the needs list will include a fully executed Purchase and Sale Agreement (PSA) for the property. This is the legally binding contract between buyer and seller, and will include a purchase timeline, important for DSCR Lenders to know when prioritizing deals for review.
DSCR Lenders will typically require a Fully Executed Contract, that must be signed and dated by all buyers and sellers, with all initials where required. Note that in this day and age, the PSA can almost always be “docusigned,” or signed electronically separately by each party. It’s important that the PSA be a fully complete copy including all pages, exhibits, riders and addenda, which are commonly added to these templatized forms. An important nuance for DSCR Loans is that PSAs must have a consistent and exact buyer name matching the borrower on the loan, specifically if the loan is being made to an entity like an LLC, the PSA must reflect the entity (and its exact name) rather than the individual (guarantor) behind the transaction. Mismatches between the buyer and borrower name (even if the buyer is the 100% owner of an entity LLC for example) will typically require a PSA to be sent back and re-executed by all parties, adding potential extra time and delays.
It’s also common for the PSAs to undergo amendments after the initial signing for DSCR Loan transactions. This is especially true when the PSA includes appraisal contingencies and financing contingencies, both of which give the buyer the right to re-negotiate or exit the deal under certain conditions. First, property inspections can spur amendments, as it’s exceedingly common for the buyer to schedule and complete a rigorous property inspection early on in the process that finds many items that can be addressed, a lot of them minor. Typically, after a property inspection, the buyer and seller will renegotiate, and the seller will agree to make some or all of the required fixes or add a credit to have the buyer fix post-close. If this occurs, a PSA Amendment will have to be drafted (typically by the buyer’s agent) and re-executed by both parties.
Additionally, many PSAs have what is called an appraisal or financing contingency, especially in neutral or “buyers’ markets.” These provisions typically allow the buyer to back out of the transaction by only having to sacrifice a small “option fee” (typically no more than $500) and receive earnest money back (typically much higher, 1-1.5% of purchase price) if the appraisal results, whether a low valuation or other aspect, jeopardize the pre-qualified financing terms. In these cases, the buyer and seller will also typically renegotiate, and for low appraisal values, the seller may reduce the price to match, or provide relief to the buyer (which will typically qualify for a DSCR Loan based on the lower of the appraised value and purchase price, so in these cases would have to cough up more than anticipated for down payment). If these post-appraisal renegotiations are fruitful, then this is another case where a PSA Amendment is necessary, also prompting redrafting and re-executing by both parties. Since these types of PSA Amendments often change the purchase price, it’s important that these types of amendments are done quickly and accurately and sent to a DSCR Lender as soon as possible.
Even small changes to the purchase price can significantly affect DSCR Loan terms, particularly since loan amounts are often based on LTV ratios and the “top of the bucket” or the high end of a 5% interval (i.e. almost all DSCR Loans in the 75.1%-80.0% LTV “bucket” are at 80.0% LTV exactly). This means that even if a loan amount only changes slightly, such as a loan planned for an 80.0% LTV ratio based on price lowers from $515,500 to $505,000 based on a slightly lower appraisal, all the key numbers and metrics change, including monthly payment, DSCR ratio and then potentially escrow calculations, liquid asset requirements, etc. forming a cascading effect. As such, PSA Amendments may have small effects, but they are wide-reaching, and can cause deal delays and issues if not promptly sent to the DSCR Lender whenever they happen. Note that large-ticket items, such as large-scale credits like a septic system or mold remediation that may not be flagged under the scope of an appraisal, may indeed preclude eligibility for a DSCR Loan and kill the deal down the line, so accurately documenting and disclosing these negotiated credits, and promptly supplying them to the DSCR Lender to confirm if allowable, is crucial.
Q: Can I change the purchase price after the PSA is signed on a DSCR Loan?A: Yes, but any change, whether from an appraisal contingency, financing contingency, or inspection negotiation, must be documented in a signed amendment and should be sent to the lender immediately or as soon as possible. Even small adjustments can impact your loan-to-value (LTV) ratio, seller concession limits, and loan approval, so waiting until closing to disclose the change can cause delays or require last-minute underwriting revisions.
Seller Concessions are amounts a seller agrees to credit toward the buyer’s closing costs, prepaid expenses, or other allowable charges. They’re negotiated in the PSA and any PSA Amendments and can take the form of a lump-sum credit or targeted payment of certain items (e.g., HOA fees, title costs, or repairs). It’s common for post-inspection items to be turned into these seller concession items, such as if the property inspector finds flooring damage estimated to cost $1,000 to repair, instead of the seller doing the repairs post-close or chopping $1,000 off the actual purchase price, they will add a $1,000 “credit” in the form of a “seller concession” to the PSA, which takes the same form of taking an amount off the price, just formatted as a rebate from total balanced proceeds on the settlement statement.
While sellers obviously look to minimize any concessions when selling their property, many parties involved in these transactions view the lever of seller concessions very favorably. For investors (buyers or borrowers on DSCR Loans), seller concessions are favored for multiple reasons. These include lower cash to close, as these credits can effectively cover certain closing costs and reduce total money required to “bring to the table” at close. Additionally, maximizing “recorded sale price” is beneficial to many buyers, since it becomes part of the market’s comparable sales data, potentially supporting higher future valuations for the property or neighborhood.
Real Estate Agents (both buyer and seller side) and the DSCR Lender’s Sales Members (the “Loan Officer” or “Account Executive” at a direct lender, or “Mortgage Broker” at brokerage) also prefer seller concessions to price cuts because all are typically paid on commission that is calculated as a percentage of property price (agents) or loan amount (lenders). As such, since seller concessions don’t actually reduce price or loan amount, all of these parties are paid more if price cuts come in the form of seller concessions or credits rather than straight-up reductions in property price.
To illustrate, imagine a property is worth $1,000,000. The buyer and seller agree to a price of $1,050,000 with a $50,000 seller concession back to the buyer. On paper, it looks like a $1,050,000 sale, which could help future comparable sales look stronger. The agent earns commission on $1,050,000 instead of $1,000,000 and the loan officer, assuming an 80.0% LTV Loan earns commission on a bigger loan amount ($840,000 versus $800,000). The buyer gets the same property for essentially the same price, just agreeing to “pay an extra $50,000” that is returned immediately at close. The buyer, the agents on the transaction and even the lender all “win,” by making more money, with the problem that the LTV ratio is artificially deflated, since the “true value” is really $1,000,000, not $1,050,000. Since most DSCR Lenders sell all their DSCR Loans to loan buyers, or eventual “Note Holders,” instead of keeping the loans on their own books, they are incentivized to originate higher loan amounts and allow higher seller concessions too, since closing fees and loan sale premiums are also based on percentages of loan amounts, simply higher loan amounts equal higher profits for DSCR Lenders.
Well, this is all not “news” to the people and parties that eventually buy these DSCR Loans (the eventual “Note Holders”) who need to be sure that the valuations and transactions are reflecting accurate prices. Because so many parties are financially incentivized to maximize the actual sale price and “play games” with seller concessions, DSCR Lenders have strict guardrails to prevent inflated or misleading pricing through seller concessions, in order for the loan buyers and note holders to be comfortable purchasing and investing in their DSCR Loans.
To prevent seller concessions from being used to inflate values, most DSCR Lenders will have caps on seller concessions allowed on purchase transactions eligible for financing with a DSCR Loan. Concessions are typically capped between 2% and 6% of the lower of purchase price or appraised market value (i.e. “applicable value”) by most DSCR Lenders, and this specific cap can vary among lenders. Additionally, seller credits are usually limited to bona fide closing costs and prepaid items and cannot be applied toward reserves, down payments, or non-real-estate costs. While credits are generally completely “fungible,” i.e. all the cash is being netted together for one “cash to close” number anyway, this can make “playing games” harder. If seller concessions are above the specific DSCR Lenders, they also might deduct the amount from the purchase price (or applicable value) for LTV calculation purposes, or more commonly, would just require an amendment to the PSA to decrease the price itself or seller concession down to the allowable limit.
Q: How do seller concessions affect DSCR Loan approval?
A: DSCR Lenders limit seller concessions (often to 2%–6% of the purchase price) and deduct them from the contract price (or the appraised value, if it's lower) for the critical LTV calculation if they exceed allowed limits. This prevents inflated prices from artificially increasing loan amounts and ensures financing is based on the true market value of the property.
The transaction price for the PSA should also reflect the sale of real property only. Items like furniture, appliances not considered fixtures or personal property are excluded from the real estate value used to determine LTV. While DSCR Lenders won’t allow non-real estate items to count towards value, there are no restrictions about actually including them in the PSA and negotiation, but they should be listed on a standard “Non-Realty Items Addendum” found typically at the back end of a PSA. This is because while DSCR Lenders don’t have any issues with a buyer purchasing furniture and fixtures, they just can’t finance them, since a lender can’t rely on the ability to foreclose on anything not affixed to the ground or property itself; a defaulted borrower can just load them into a truck or car and take them away!
An Earnest Money Deposit (“EMD”) is a typical aspect of all real estate acquisition transactions, where the buyer agrees to deposit a certain amount of cash (typically around 1% of the purchase price) within a few days of going under contract. This money is then utilized at closing as part of the purchase price if the sale goes through or returned to the buyer if the sale falls apart due to provisions in the PSA that allow the buyer to cancel the deal (such as the inspector finding significant undisclosed damage or an appraisal contingency being triggered). If the buyer backs out of the transaction without a valid reason as laid out in the PSA, the seller will get to keep the earnest money as recourse, essentially to compensate for the wasted time and opportunity of taking the property off the open market for a buyer that then backed out. For DSCR Loans, the EMD is considered an eligible source of funds for down payment and closing costs and it must be fully documented during the underwriting process (as part of the lender’s overall down payment and liquid assets analysis).
DSCR Lenders typically require Proof the EMD Cleared the Borrower’s (Guarantor’s) Account, i.e. evidence that the EMD check or wire cleared the borrower’s bank account. This can typically take the form of a copy of the canceled check, a wire transfer confirmation or a written statement from the EMD holder (often the title company or escrow agent) verifying receipt. Note that the EMD cannot be counted twice (i.e. “double-counted”) in underwriting (both deducted from total funds to close and counted again in liquid assets reserve requirements). While “sourcing” EMDs will only need to occur generally if it’s over the $10,000 limit, some DSCR Lenders will require full documentation of the account utilized to provide earnest money, so it’s borrower best practice to use the same account for the EMD as for the full down payment and liquidity reserves documentation to minimize time and paperwork.
Q: What documentation is needed for an earnest money deposit on a DSCR loan acquisition?
A: DSCR Lenders typically require proof that the EMD cleared your account (such as a canceled check or wire confirmation), bank statements showing you had sufficient funds at the time of payment, and evidence that the funds came from an eligible source. The EMD must also match the amount and terms in the purchase contract and cannot be “double counted” in your liquid assets.
Up Next: While PSA and EMD documentation is only applicable on acquisitions for obvious reasons, the flip side is a document applicable for (most) refinances only - the Subject Property Mortgage History - a key piece of the credit puzzle for DSCR Lenders when evaluating risk. Hint: lenders care a lot about if you've missed payments or had any trouble with your current loan on the property, so when planning to refinance into a DSCR Loan, its of utmost importance to keep your credit record on the property clean.
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