Since the DSCR space isn’t regulated like conventional loans, lenders (and brokers) can get away with some shady stuff, with oftentimes no consequences. For starters, how a DSCR lender markets. This is why I vet lenders carefully before marketing their product, although sometimes I too fall victim to the misconceptions.
One thing about investors they care about most (aside from rates), is how quickly can a lender close. Because of this, to attract more business, lenders will market things like “we can close a DSCR loan in 2 weeks.” Ugh. This line pisses me off the most in the industry, because they’re leaving out important details. Every time a lender markets this line, I reach out for details, and every single time it’s the same damn thing. The only way they’re able to close that quickly is if the file basically has the clear to close with another lender and you’re transferring the file to them. You need appraisal completed, title completed, and all the docs required by underwriting. What I find interesting is, they are marketing as-if speed is their game, yet it takes them 2 weeks to underwrite a complete file that’s being transferred? There’s some irony there.
Another thing to look for: rate talk. I see DSCR brokers and loan officers in the sector on social media all the times saying things like “we have rates in the 5’s”, while the sector is in the mid 6’s. Then you request a quote and rates are a full 1% of what they claimed, only to find out in order to get in the 5’s or whatever they marketed, you need to do 60% LTV and 3% origination. Here’s an insider tip: less than 20% of closed loans in the DSCR are less than 70% LTV, let alone 3% origination. Again, more false advertisement that’s allowed due to lack of regulation.
A third negative: folks taking advantage of borrowers not being familiar with the DSCR space, since it’s newer, and up charging the broker fee. I don’t go around telling people what they should charge, but I also don’t believe in robbery. The industry average broker fee is 2%. I charge 1.5% (unless the deal is under $175k, then it’s a flat $2,500). Yet, I’ve seen term sheets from borrowers doing $2 million loans where the broker is charging 3% and the rates are higher than average. How?! How do you have the audacity to struggle to get your borrower solid terms, or at least average, yet charge more?
I know with everything I’ve said, it may come off like I want the DSCR space to be regulated. That’s not the case. I’d just like to see a little morals in the space that I’ve dedicated so much of my life to.
I agree 100%