A 1.23 against a 1.25 floor, and two points to fix it
The file missed the minimum by two hundredths. Buying the rate down half a point moved coverage to 1.28 and cost $7,110, which was the cheapest of the three ways out.
The deal
A three bedroom cabin outside Blue Ridge at $474,000. Twenty-five percent down, $355,500 borrowed on a thirty year DSCR loan. Credited income of $3,950 a month from the appraiser's schedule. Property taxes $5,200 a year, insurance $3,100, no association dues.
The problem
At the quoted 7.625%, P&I is $2,516 and PITIA is $3,208. $3,950 divided by $3,208 is 1.23. The product's minimum was 1.25.
Two hundredths. There is no argument to be had with an underwriting engine about two hundredths, and no version of the appraisal that changes it. The three things that move DSCR are the income the lender credits, the loan amount and the rate, and the first of those was already settled.
The three levers, priced
We put all of them in front of the buyer with the actual dollars attached, because the right answer depends entirely on which resource is scarce.
- More down. Another $12,000 at the table takes PITIA to $3,123 and coverage to 1.26. Cheapest in fee terms, but it is cash that stops working, and the buyer wanted their reserves intact for the furnishing budget.
- Buy the rate down. Two points, $7,110, moves 7.625% to 7.125%. P&I falls to $2,395, PITIA to $3,087, coverage to 1.28.
- A different product with a 1.20 floor. It existed and it approved, but it priced 0.375% higher, which costs more than the points over any holding period past about three years.
The buyer bought the rate down. It cleared the floor with more room than the extra down payment did, it kept the reserves liquid, and it is the option that keeps paying if they hold the property, which they intend to. Points were financeable into closing costs at this lender, so the cash impact at the table was smaller than the headline figure.
How it closed
Twenty-nine days. Final terms 7.125% on $355,500, DSCR 1.28 against a 1.25 floor, points paid at closing.
The honest footnote we gave the buyer with the closing package: at 1.28 the property covers its debt with about $860 a month of room, before a dollar has been set aside for capital expense, management or the winter the calendar does not fill. Coverage is a lender's test. It is not a business plan, and the two get confused most often on the deals that only just pass.
A buy-down is prepaid interest, not a discount. It earns its place when it buys you the loan, which is a different calculation from shaving a payment.
