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7 min. read

DSCR Loan Interest Rates for October 2022

Tim Lucas Photo
Senior Editor
DSCR Loan Interest Rates for October 2022
Tim Lucas Photo
Senior Editor
7 min. read · 09/21/2022

Do DSCR Loans Come With High Rates?

Debt Service Coverage Ratio (DSCR) loans are an up-and-coming program that is helping investors acquire properties faster than they may have been able to before.

These loans use the property’s potential income to qualify, not the buyer’s personal income.

This eliminates the need to supply complex tax returns, which may not show enough income anyway if you have business expense write-offs or are a full-time investor.

But with no income verification, are DSCR loan interest rates sky-high?

You might be surprised.

What’s in this article?

DSCR loan interest rates this month
DSCR ARM rates
Do I have to pay points?
How do I get a lower DSCR rate?
Can you lock a DSCR rate?
DSCR loans explained
DSCR rates FAQ
Get a DSCR loan rate quote

DSCR loan interest rates for October 2022

DSCR loan interest rates were around 1.25% higher than Fannie Mae and Freddie Mac conventional rates in September 2022, says OfferMarket’s DSCR Loan Index.

According to the index, current DSCR rates average 7.72% as of September 21, 2022, assuming a 30-year fixed loan with 25% down and a 1.2 DSCR ratio. That’s compared to an average conventional loan rate of 6.47%, says the index.

The “spread” or difference between DSCR and conventional loan rates has increased recently, says OfferMarket, from 0.84% in late 2021 to 1.25% now.

That’s because lenders who sell groups of DSCR mortgages to investors lose money when they have to sell a set of loans with below-market rates.

Because rates rose quickly in 2022, DSCR lenders are hedging their bets a bit, charging a slightly higher mortgage rate for these loans than they do in more predictable times.

However, as the market stabilizes, expect DSCR lenders to reduce the spread between DSCR and conventional loan rates, potentially lowering rates for investors.

Considering DSCR ARM rates

While the average DSCR fixed rate is in the high 7s currently, you may be able to find lower rates by considering an adjustable-rate mortgage, or ARM.

According to Griffin Funding, a 6-month SOFR ARM can be had at 5.375% with 1.25 points as of September 21, 2022. 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.

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

According to OfferMarket, 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 for this fee. 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.

Beware of outdated DSCR rate information

Mortgage rates of all types skyrocketed in early 2022. When searching for current DSCR rates, ignore mentions of rates from 2021 or even early 2022. These are sorely outdated and much higher now. Don’t calculate a deal’s cash-flowing prospects just to find out that rates are 2-3% higher than an outdated source told you.

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 loans 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. 

These loans are gaining popularity with investors who can find cash-flowing deals but can’t verify enough income via tax returns or from employment sources.

DSCR loan interest rates FAQ

What is the interest rate on DSCR loans?

According to OfferMarket, the current DSCR average loan rate is 7.72% as of September 21, 2022 assuming 25% down and a DSCR of 1.2. Your rate might be higher or lower depending on the lender, your location, and your scenario.

Are DSCR loan rates high?

DSCR loan rates are about 1-2% higher than conventional rates, which is not high considering this is a non-owner-occupied loan that requires no income documentation.

Is it hard to get a DSCR loan?

For the right real estate investor, A DSCR loan might be easier to get than a conventional loan. A cash-flowing property’s income can be used in lieu of personal tax returns and other income verification docs.

Do you need a down payment for a DSCR loan?

Yes, you typically 20-25% for a DSCR loan down payment. You also may need 6 months’ cash reserves after closing to qualify.

DSCR loan rates: Low considering what you get

Considering DSCR loans are a no-income-verification mortgage, paying 1-2% more 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.

More on DSCR Loans