DSCR Appraisal Costs
An appraisal for a DSCR loan is going to be slightly higher than an appraisal for a conventional loan, or an FHA or VA loan. The main reason is the appraisal will have to measure the fair market rents, that is an additional appraisal that usually costs around $150. It is included in the actual appraisal (section 1007 or 1025).
You, the borrower, pay for the appraisal out of pocket before it is scheduled. You should be sent an invoice and you will pay it directly.
Note: It is illegal for a lender or broker to charge you more for an appraisal than what it actually costs.
The appraisal should always be done through an appraisal management company.
Appraisal Management Companies (AMC)
An AMC is a third party company between lenders and appraisers. They are necessary today because an AMC will have it’s own insurance, they will vet appraisers, and they will work through issues that inevitably come up for you.
AMCs have their panel of approved appraisers they maintain across the country. This way you won’t have to worry about getting an appraiser that is going to screw anything up, which happens from time to time.
It is best to pay the extra few bucks to go through an AMC versus being screwed by an appraiser that had a bad day and took it out on your property. Cheap insurance we will call it.
DSCR Appraisal Requirements
In order for a lender to accept the appraisal, there are some hard and fast requirements. The first is the condition. There are 6 types, ranging from new construction C1 to a property that basically needs to be torn down C6.
Most lenders don’t lend on properties in C5 or worse condition.
Next the property needs to be in “As-Is” condition. That means the value the appraiser gives is for the property as it currently is.
The property can be marked “Subject-To”, which means the property is worth the value subject to certain things that need to be fixed BEFORE it is worth that value.
For example, a property needs a roof repaired because there are signs of water damage. (TRUE STORY) The appraiser pops his head in the attic and he sees in the middle of the roof a large 2 inch wide slit where he can literally see sky. Water leaks in and causes water spots and a stench. This appraisal was marked subject to (along with others) the hole in roof repaired.
The solution was for the buyer to work with the seller. That meant the buyer came out and repaired the hole while the seller did nothing. The lender had to order a 1004D, an additional appraisal inspection to show the work was completed (usually around $200-300).
There are some other factors, but these are the most important to consider. And you can figure these things out quickly when you inspect the property yourself.
DSCR Appraisal Types
There are two main DSCR appraisal types for residential properties, 1004 (single family residences) and 1007 rent schedule & 1025 (multi family homes) and 216 rent schedule.
These are standard for all lenders. They are required for every mortgage transaction and the appraisal has to be used for that transaction. You can’t use an appraisal you used when you bought the property for a refinance a few months later. Plus the appraisal is only good for 4 months (can be extended for 2 months after that).
Rent ready or fixer upper
Some real estate investors want to but a property and rehab or renovate it. This is the first “R” in the “BRRRR Method”.
This may work with a DSCR loan, as long as the property is in rent ready shape, or in C1-C4 condition. Basically, would you feel comfortable letting your grandma live in the property as is? Or is it going to need some work before it can get there?
If it needs work, look at a rehab loan, or construction loan. If it is ready for your grandma, then it should qualify for a DSCR loan.
Going the DSCR route is cheaper and you’ll only need to pay closing costs for one mortgage transaction. But are you going to keep the property long term? Is this a flip? Are you going to finance the rehab costs? Are you not sure what you want to do?
If you don’t know these answers, you should get as many answered as you can, or weigh whether flexibility (rehab loan) or absolute cost (DSCR loan) is most important to you. Sometimes the appraisal will show the property needs too much work and it will decide for you.
Final word
Appraisals are tricky with any mortgage transaction. They are crucial for a DSCR transaction because there are so many variables that ONLY an appraisal can answer.
Working with an experienced mortgage professional that is experienced in DSCR loans is crucial to avoid pivoting and pivoting when things don’t seem to go your way. If you have specific questions on your property and they have not been answered here. My team of experts on DSCR loans is here to guide you through the process to avoid as many pitfalls as we can.
Don’t let a poor appraisal stand between you and your next big investment. Contact us today to connect with top-tier appraisers who specialize in DSCR mortgages and secure your financial future now!
Call or text: 949-315-0742
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