The interest rate increases which began in early 2022 have had a major effect on long-term private lending for residential rental properties. In this guide, I’ll provide an update on interest rates for DSCR rental loans as of August 2022, our prediction for where rates will be by the end of the year, and how to find out the current rates offered by various private lending companies, which are also known as hard money lenders.
Private mortgage lending is mainly for short-term financing up to 2 years, but starting in 2018, Wall Street capital markets developed an ecosystem enabling private lending companies to offer long-term loans up to 30 years for residential investment properties. The DSCR loan program helped fuel an explosion in residential real estate investing while interest rates were low enough for most investment properties to qualify.
The loans are called DSCR because the debt service coverage ratio is the primary qualification, not the borrower’s personal income. In addition to having the rental be cash-flow positive, investors need a minimum down payment of 20%, and a credit score over 650. Most DSCR loans are 30-year fixed terms, but some lenders offer a 5, 7 or 10-year program.
Past and Current Interest Rates for DSCR Loans
In February 2022, the interest rates for DSCR loans typically ranged from 4.25% to 5.50%. Since the Federal Reserve started increasing interest rates in March, DSCR loans have experienced a major increase in rates, at a very rapid pace. By July, the minimum interest rate was 7%. In mid-August, there was a slight drop.
As of August 31, 2022, the DSCR interest rates for most lenders range from 6.75% to 8.50%.
If you see a lender advertising rates lower than this in 2022, it’s either because they haven’t updated their websites, or they are promoting an adjustable rate program, which is not popular in a rising rate environment.
Unlike short-term private lending, there is little variation in interest rates with fixed-rate DSCR loans. The pricing is pretty much the same across the private lending community, so shopping around for lower rates could be a waste of time. Almost all of these long-term rental loans are sold to the secondary market, which includes Wall Street securitizations and insurance companies.
Lenders price their loans according to the secondary market’s pricing, and this is fully dependent on the federal funds rate. So lenders are not increasing interest rates to make a higher profit. It’s really out of their control.
DSCR Interest Rate Prediction for 2022 Q4
This guide was published at the end of August 2022, a few weeks after the Federal Reserve increased rates for the 4th time this year. Since March, the 4 rate hikes have totaled 2.25%. Most of us in the mortgage industry expect the Fed to hike rates again in September by 75 basis points (0.75%) and another 50 basis points (0.50%) in November.
Therefore, I predict that by mid-November, the new interest rate range for fixed-rate DSCR rental loans will be 7.5 percent to 9.5 percent.
Qualifying for DSCR Rental Loans in 2022
The interest rate hikes have definitely slowed down residential real estate investing activity, but many investors are coping with the new reality, and deals are still getting done. The higher interest rates are making it harder to achieve the minimum debt service coverage ratio requirement, which for most lenders is 1.2 at this time.
To make deals work in this environment, real estate investors must reduce their debt, by having a larger down payment for a purchase, or by taking a lower loan amount with a refinance. Despite all the turmoil with interest rates, there is still a lot of capital available to real estate investors.
How to Find Lenders for DSCR Long-Term Rental Loans
If you’re seeking a DSCR rental loan, use our website as a resource to find direct lenders. All the private lending companies listed have a detailed profile that shows their guidelines for long-term rental loans. There are two options for using our platform.
Option 1: Browse Lenders
Search on our site for direct lenders. All lenders have a very detailed profile with information about their lending guidelines, rates, fees and much more. Make contact with each out directly by email, phone call, or visit their websites. First select a loan type, then enter the state where the property is located.
Option 2: Create a Loan Request
Fill out a questionnaire with information about your financing needs. You can then browse lenders and invite a few of them to view your deal. Or ask us for recommendations; we’ll review it and invite a few select lenders that we feel may be a good fit.