DSCR Loan Interest Rates for October 2023

Current DSCR rates are 8.12% as of September 28, 2023 assuming a well-qualified buyer and property. Rates can be as high as 9.13% depending on credit score, investor experience, and other factors. That’s compared to an average conventional loan rate of 7.31%, according to Freddie Mac.

DSCR loan interest rates were 0.81% to 2.0% higher than conventional rates as of September 28, 2023, says OfferMarket’s DSCR Loan Index.

Chart: OfferMarket.us

It’s important to shop around when considering DSCR lenders. One might offer you a better rate and/or fee structure than another.

DSCR rates assume a 30-year fixed loan, 2 points, 25% DSCR down payment, a 1.1 DSCR ratio, 720 credit, and a 5-4-3-2-1 prepayment penalty.

Tip: Your DSCR loan rate makes a big impact on whether you’ll qualify. A low rate can improve your debt service coverage ratio from 1.1 to 1.2, for instance.

What’s affecting DSCR rates today?

It appears the worst could be over as far as Fed rate hikes.

While the Federal Reserve did increase the fed funds rate by 0.25% at its July 26 meeting, investors are predicting that the group will not hike rates again until perhaps December. There’s currently a 64% chance of no hike in December versus a 32% chance for a 0.25% hike, says CME Group.

DSCR rates have slowly risen all year, with few reprieves. Just like the overall interest rate market, DSCR rates are sensitive to inflation, Federal Reserve policy, and the economy as a whole.

Here’s how the 5-year has faired over the past six months.

Chart: YCharts

It could be a good time to get your DSCR loan in process so you’re ready to lock lower rates if they come. Getting a DSCR rate in the low 8s is an incredible deal, considering these are no-tax-return investor mortgages. Full-doc, conventional owner-occupied loans are pushing 7.5% at the moment, so DSCR loans are an incredible value.

Where will DSCR rates go next?

Interest rate predictions of all kinds are difficult because no one really knows what will happen with the economy. For the time being, though, expect DSCR rates to remain elevated. Assume rates of at least 7.5-9.5% for the foreseeable future while inflation remains high and the Fed continues fighting it.

DSCR rates could fall if inflation eases or the economy takes a serious turn for the worse. In such an event, the 5-year treasury could sink, bringing DSCR rates down with them.

While lower rates sound good on the surface, also consider that the credit landscape could worsen. Non-QM loans may be harder to come by. Also, it could get harder to rent out an investment property. After all, people without jobs don’t rent homes and apartments. So while current DSCR rates are high, some consider it a blessing because it’s a reflection of a strong economy and therefore strong rental market.

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Factors that affect your DSCR rate

Besides the macro economy, there are other factors that affect your rate.

1. The property’s cash flow (its DSCR)
2. Your real estate investing experience
3. Credit score: up to +0.50% for lower credit scores
4. Loan to value: up to +0.40% for low down payments
5. Loan amount: up to +0.50% for low loan amounts
6. Prepayment penalty: up to +0.65% for a shorter prepay penalty period

DSCR loans are not standardized nationwide, but that’s a good thing. It means, where one lender may not consider your scenario or charge a very high rate, another might be quite comfortable with the situation. The only way to know is to check with a variety of lenders.

Considering DSCR ARM rates

While the average DSCR fixed rate is in the 7.5-9% range currently, you may be able to find lower rates by considering an adjustable-rate mortgage, or ARM.

A 6-month SOFR ARM is one that is based on the Secured Overnight Financing Rate, which is a widely-used index that follows current market conditions.

A 6-month SOFR ARM carries a fixed rate for six months, then adjusts every six months based on the SOFR index. Lenders also offer ARMs that are fixed for three, five, seven and 10 years, although ARMs with longer fixed periods will also come with higher rates.

ARMs come with risks, as you might guess. If rates skyrocket while you have a 6-month ARM, your rental property cash flow could disappear or even go negative. 

Consider these risks carefully when deciding between a higher fixed rate and a lower variable DSCR loan rate.

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Do I have to pay points to get a low DSCR rate?

Lenders typically charge 1 to 2 points. One point is 1% of the loan amount.

For example, a lender that charges 1.5 points on a $300,000 DSCR loan collects $4,500 in points. Keep in mind that other fees may apply, such as an underwriting, processing, or application fee, plus third-party fees like title, escrow, and appraisal.

In general, the more points you pay upfront, the lower rate you pay.

How do I get a lower DSCR rate?

There are ways to get a lower DSCR rate, therefore making the rental property yield more cash each month.

Bring a more solid deal: Lenders often give lower rates for properties with higher DSCR ratios. For example, a property that brings in 50% more income than its payment has a DSCR of 1.50 and may get a lower rate than a property with a 1.1 ratio.

Put more down: A bigger down payment means less risk for the lender, yielding lower rates.

Get experience: Lenders factor in your experience as a landlord and investor when pricing these loans. As you gain experience, lenders may give you a lower rate.

Improve your credit: Your credit score shows whether you’ve made on-time payments in the past, and is a good indication of how you will handle future debt.

Consider an ARM: As discussed, ARM loans come with lower rates, but they also carry risks for rising rates and payments when the fixed period ends.

Shop lenders: Don’t assume the first lender you call has the best rates. Another lender could offer a very similar product and guidelines while offering a lower rate. If you’d like to get a custom rate quote from a My Perfect Mortgage partner lender, submit your scenario here.

Pay points: If you have plenty of cash reserves, consider paying points upfront to reduce your rate.

Try for a traditional loan: If you can document enough income, you might get approved for standard conventional financing, which might come with lower rates.

Can you lock a DSCR loan interest rate?

According to OfferMarket, DSCR loan locks are not common. That means, if rates change between the time you find the home and closing, either the lender will eat the difference or will raise your rate. 

Have an upfront conversation before applying about what happens if rates rise during loan processing.

DSCR loans explained

In case you are just starting to learn about DSCR loans, here’s a basic explainer.

The main benefit to a DSCR loan is that the lender uses the property’s income to qualify, not the buyer’s personal income. 

Traditional investment property loans require two years’ filed tax returns for self-employed borrowers or W2s and paystubs for salaried ones. 

If you think about it, that doesn’t make a lot of sense for cash-flowing properties. Why require the buyer to prove they make income when the property pays for itself?

DSCR loan requirements allow you to leverage a situation in which the property’s income “covers” the debt payment, as the name Debt Service Coverage Ratio suggests.

For instance, here’s a hypothetical property scenario.

• Monthly rental income: $1,800
• Full proposed future payment including principal, interest, taxes, insurance, and HOA dues if any: $1,600
• DSCR = Income / Payment
• DSCR = 1.125

The property pays for itself and leaves a cushion each month for expenses, vacancies, etc. 

Even though there are DSCR loan pros and cons, these loans are gaining popularity with investors who can find cash-flowing deals but can’t verify enough income via tax returns or employment sources.

DSCR loan interest rates FAQ

DSCR loan rates: Low considering what you get

Considering DSCR loans are a no-income-verification mortgage, paying a slightly higher rate than for a conventional loan rate is actually a good deal.

You can avoid the pain of supplying two years’ tax returns that might not show much income anyway. 

If you have a cash-flowing deal, submit your scenario to our DSCR lender network and we’ll find a match for you.

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