Where Strategy Drives Approval: Anticipate, Mitigate, Close #
The underwriting process is where the lender verifies every piece of information provided. For the DSCR investor, this is a race against the clock. Understanding the four stages and proactively mitigating “Stipulations” (Stips) ensures a fast, drama-free closing.
The Four Stages of DSCR Underwriting #
Stage 1: Processing (The Checklist Phase) #
- Focus: Document gathering and initial ordering of third-party reports.
- Your Action: The processor confirms all documents from your Pre-Approval Blueprint are correct and orders the Appraisal, Title Search, and Insurance Binder.
- Key Indicator: The speed of this phase is 100% dependent on your organized, initial submission.
Stage 2: Appraisal (The Valuation Phase) #
- Focus: Establishing the property’s market value (LTV) and rental income (DSCR numerator).
- Lender Risk: If the appraisal value comes in low, your Loan-to-Value (LTV) ratio increases, which may require a larger down payment. If the estimated rent is low, your DSCR drops.
- Your Action: Provide the appraiser and lender with compelling, recent rental comparables (comps) to support your projected income.
Stage 3: Underwriting (The Scrutiny Phase) #
- Focus: The underwriter reviews the entire file (Appraisal, Title, Insurance, your reserves) against the lender’s guidelines.
- The Stipulation (Stip): If anything is incomplete, contradictory, or questionable, the underwriter issues a Stip. These are requests for more information or corrective action (e.g., “Need full 60 days of bank statement,” or “HOA lien needs to be removed”).
- Your Action: Address Stips immediately, completely, and without argument. The file is stagnant until the Stip is cleared.
Stage 4: Closing (The Final Phase) #
- Focus: Final review and preparing the closing documents (CD).
- Key Indicator: The title company ensures a clear title (no outstanding liens, correct ownership structure).
- Your Action: Review the Closing Disclosure (CD) immediately for accuracy, specifically the final interest rate, fees, and monthly payment.
Common Underwriting Red Flags and Proactive Mitigation #
| Red Flag (Stipulation) | Lender Concern | Proactive Mitigation Strategy |
|---|---|---|
| Source of Funds | Large, recent deposits are not accounted for. | Only use seasoned funds (in account > 60 days) or provide clear paper trails for all large deposits (e.g., sale of an asset). |
| Title Issues | Undisclosed easements, old liens, or incorrect entity name on the Deed. | Purchase Title Insurance early. Confirm your LLC or Corporate name matches the purchase agreement exactly. |
| Low DSCR Score | Risk of negative cash flow, indicating a poor investment. | Be ready to increase your down payment to lower the PITI, thereby increasing the DSCR above $1.00$ or $1.25$. |
| Credit Report Discrepancies | Unpaid collections, recent derogatory marks. | Pay off and resolve collections before applying. Write letters of explanation (LOEs) for any unavoidable issues. |
The Bottom Line: An organized, prepared investor who understands the process minimizes friction and maximizes closing speed, ensuring they never miss a profitable opportunity.
