The best DSCR lenders provide rental property investors with consistent access to capital at consistently competitive terms. In this article, we'll share the inner-workings of the DSCR loan industry to help you select the best DSCR lender for your rental business. Let's get started!
In order to select the best DSCR lender to work with, it's important to understand how the DSCR loan industry works, the players, how they are compensated, and who you are working with. As you read on, you will realize that the lines are blurred between these players. Embrace the ambiguity, and stick with us...
Here are the players:
Brokers generally refer you to a 3rd party lender, ("direct lender") who ultimately funds your loan. The broker is typically responsible for collecting all of the information that the direct lender needs in order to underwrite, approve and fund your loan. Brokers either identify as brokers or private lenders. Brokers get paid an origination fee or a broker fee which will be a line item on your HUD-1 or ALTA settlement statement.
Private lenders are either brokers, or they are direct lenders. Many private lenders do not lend their own capital, instead they work with capital providers who provide the funds at closing. Some private lenders originate your loan with their own capital, and then they sell it to an aggregator or institutional credit investor. Very few private lenders keep DSCR loans on their own balance sheet because the interest rate is too low and the loan term is too long. Private lenders get paid an origination fee or a broker fee and also charge one or more of the following fees: underwriting fee, processing fee, admin fee.
Direct lenders are either private lenders who originate and then sell your loan to an aggregator or institutional credit investor, or they are an aggregator or institutional credit investor with their own origination operation. Direct lenders charge an origination fee, along with one or more of the following fees: underwriting fee, processing fee, admin fee.
Capital providers work with a network of private lenders who originate loans using funds from the capital provider. Capital providers can be banks who provide private lenders with a "warehouse line of credit" or "warehouse facility" to originate loans that are then sold to aggregators and institutional credit investors. Capital providers, in many cases, act as aggregators who purchase these DSCR loans either prior to, at the time of, or shortly after origination. Capital providers may split the origination fee with the private lender that originates the loan. Capital providers make money when they sell the loans to other aggregators and institutional credit investors.
Aggregators aggregate (accumulate) a large number of DSCR loans that they then sell directly to institutional credit investors, or securitize and then sell to institutional credit investors. A DSCR securitization is a portfolio of DSCR loans that is analyzed and rated by a bond rating agency such as Fitch, Kroll, S&P or Moody's, and then sold as a more easily trade-able security ("commercial mortgage-backed security" or "CMBS") to institutional credit investors.
Rating agencies determine the quality of a CMBS that includes DSCR loans. Rating agencies focus on the following metrics:
Institutional capital providers review the rating of a given securitization to determine whether or not they are willing or able to invest.
Institutional credit investors are most commonly insurance companies, mortgage trusts, pension funds and credit, debt or bond funds. These investors tend to be long-term holders of DSCR loans. They are attracted to DSCR loans for the higher yield than conventional mortgage-backed securities (+/- 1% higher) and 5 Year US Treasury bonds (+/- 3.6% higher).
It's OK if your head is spinning -- there's a lot going on behind the scenes when it comes to your DSCR loan. Here are the key takeaways:
Finding a DSCR lender that's the right fit for your rental investing strategy is key. We've found that the best way to match with a DSCR lender is to first identify what matters most to you.
Most lenders require 6 months of ownership ("seasoning") before allowing a refinance. There are lenders, including OfferMarket, that have no seasoning options.
DSCR loans are most commonly purchased by institutional credit investors and unfortunately very few allow rural properties to be included in mortgage-backed securities that they purchase. As a result, it is very rare to find a DSCR lender that will provide a DSCR loan for a rural property. If you have a rural rental property, your best bet may be to establish a relationship with a local bank that will keep your DSCR loan on their balance sheet.
DSCR loans are considered "business purpose loans" so most DSCR lenders require title of the property to be held in an LLC or corporation. It's actually harder to find a DSCR lender that will allow you to borrow in personal name.
While a good broker can provide you with a significant advantage by matching you with the best lender on a transaction by transaction basis, the reality is that most brokers lack the relationships, systems and control to provide a consistently great, low-cost borrowing experience.
OfferMarket is a technology-enabled "super broker". Thousands of rental property investors use OfferMarket to get the most competitive terms for their next DSCR purchase or refi.
The largest and most competitive capital providers, aggregators and institutional credit investors have access to our DSCR loan origination platform.
Our technology matches your loan request with the best offer (terms) available from these institutional capital providers, and makes it fast and easy to process your loan through our online portal. The OfferMarket platform is designed to provide rental property investors with consistent access to capital at the best possible terms. Get an instant quote for your next DSCR loan today!
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