As the DSCR space grows, more investors are becoming acquainted with the requirements and what to expect, but what makes it different than the conventional side of the financing industry?
Capital – Conventional lenders get their capital from the FED. Therefor, they have a set of rules to abide by, and these rules often disqualify even high net worth real estate investors. They often require certain debt-to-income requirements, more documents, and more strict underwriting guidelines. Whereas DSCR lenders get their capital from what’s known as “capital partners” and other private lenders (hedge funds). Therefor, the rules and qualifications are much more relaxed.
Credit – DSCR lenders don’t report the mortgages on your credit, since they are typically only for investment properties, the loans are considered “business loans”, with the property being used as collateral and no need to issue the debt on your personal or business credit. Conventional lenders almost always report on credit, aside from the small percentage of credit unions who don’t.
Documents – As mentioned in the first portion, DSCR lenders require much fewer docs. No W2’s, tax statements, pay stubs, or DTI verification is needed, since approval is based on the cash flow of the investment property, not your personal income.
Rates – Historically, conventional has always been lower in rates than the DSCR sector. However, since late 2021, conventional lenders have been shying away from lending to investors, causing a jump in rates and more origination costs, in an attempt to decrease their investment loan portfolio. This has also helped the DSCR sector grow over 1,000% in just 3 years.
Time frame – This is a sticky one, as some DSCR lenders can drag their feet and take just as long to close a loan as a conventional lender, but 90% of the time, single asset and even small portfolio loans should take no longer than 4-5 weeks in the DSCR sector. Conventional, however, can run 6 weeks.
Rate lock – The DSCR side isn’t all sunshine and rainbows. DSCR lenders often can’t and won’t rate lock until appraisal comes back and the file has been reviewed by underwriters. This is because the loan is based on the appraisers estimated value and since the loan amount is tied to the appraised value, no terms are set in stone to be rate locked.
Regulation – This is where paying an experienced broker goes a long way. The DSCR space is not regulated to the degree the conventional is, since it’s not the Federal Reserves capital being lent out. Because of this, some lenders have been know to bait and switch near the finish line. After all, you often don’t sign an official “rate lock” sheet with DSCR lenders like you do with conventional lenders. So using a broker who knows how these lenders operate is key.