Best DSCR Lenders

Last updated: April 15, 2024

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The DSCR loan industry is growing fast. As a real estate investor, it's important to understand how it works so you can access the most reliable capital at consistently competitive terms. In this volatile market, there's a wide variance in DSCR loan terms and lender performance.

In today's market, there's a good chance you'll face situations where DSCR is not high enough to support your target loan amount or cash flow. The rapid rise in interest rates has made it difficult for rental investors to get purchase and refi transactions to the finish line. The best DSCR lenders understand how to structure your loan terms to help you accomplish your goal and get your deal done. The best DSCR lenders can provide you 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 portfolio. Let's get started!

Best DSCR loan Insights

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. We think about the DSCR loan industry as a production line -- by understanding the production line, you will be able to access the most reliable sources of capital and consistently competitive terms. 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
• Private Lenders
• Direct Lenders
• Capital providers
• Aggregators
• Rating Agencies
• Institutional Credit Investors

Brokers

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.

Let's take a look at the pros and cons of working with a broker for your DSCR loan.

Private DSCR Lenders

Best DSCR Lenders are typically either brokers or direct lenders. Many of the Best DSCR Lenders do not lend their own capital; instead, they collaborate with capital providers who supply the funds at closing. Some Best DSCR Lenders originate loans using their own capital and later sell them to an aggregator or institutional credit investor. However, very few Best DSCR Lenders keep DSCR loans on their balance sheet because the interest rate is too low and the loan term is too long. Instead, Best DSCR Lenders typically charge an origination fee, broker fee, and may also impose additional fees like underwriting fees, processing fees, and admin fees.

Direct DSCR Lenders

Best DSCR Lenders who are direct lenders typically fall into one of two categories: they 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. The Best DSCR Lenders charge an origination fee, along with one or more additional fees such as underwriting fees, processing fees, and admin fees. Best DSCR Lenders often operate through both a “retail” channel and a “wholesale” channel. The retail channel serves borrowers directly, while the wholesale channel works with private lenders and brokers to source loans, either white-labeling under the broker’s entity name or using a generic funding entity name.

Let's review the pros and cons of working with the retail division of a direct lender.

Capital Providers

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

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

Rating agencies determine the quality of a CMBS that includes DSCR loans. Rating agencies focus on the following metrics:

• Borrower credit score
• LTV
• DSCR

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

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).

Production Line: Key Takeaways

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:

• many different players can be involved with origination, this is your main point of contact.
• institutional capital providers are most likely the ultimate investor and holder of your DSCR loan. These institutional capital providers have specific risk appetites and requirements that ultimately determine DSCR loan guidelines and your terms.

How to find a Best DSCR lender?

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.

• Do you want excellent customer service?
• Do you want an online, self-serve capability?
• Do you want DSCR loans for long term rentals or short term rentals?
• Do you need DSCR loans for properties valued less than $100,000?
• Do you want DSCR loans with no seasoning?

Best DSCR lenders for cash out refi no seasoning

Most lenders require 6 months of ownership ("seasoning") before allowing a refinance. There are lenders, including OfferMarket, that have no seasoning options.

Best DSCR lenders for rural properties

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.

Best DSCR lenders for LLC

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.

Should I work with a broker for my DSCR loan?

While a good broker can provide you with a significant advantage by matching you with the Best DSCR Lenders on a transaction-by-transaction basis, the reality is that most brokers lack the relationships, systems, and control needed to consistently provide a great, low-cost borrowing experience with the Best DSCR Lenders.

What is a super broker?

OfferMarket is a technology-enabled "super broker". Thousands of rental property investors use OfferMarket to get the most competitive terms for their DSCR loans.

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!