Lack of Liquidity for DSCR Rental Loans
Obviously the increased interest rates are making it tough to close loans, but aside from higher rates, the lack of liquidity is the primary reason that it’s tough to get DSCR rental loans funded. And what we mean by lack of liquidity is the large institutional investors that used to buy pools of DSCR loans are currently out of the market.
Almost all DSCR loans are sold to the institutional secondary market, then pooled in bulk and securitized as a bond. At this time, no public securitization deals are closing. The increased federal funds rate caused bond investors to focus on other investments that offer a similar yield.
And many of those investments are rated securities. As of December 2022, the large rating agencies have not yet rated private lending securitizations, so we have a limited number of bond investors to recapitalize the private lending industry.
A few insurance companies have an appetite for long-term rental loans, but they only buy from the largest private lending companies. And some institutional capital providers are still buying DSCR loans on a selective basis and holding the loans on their balance sheet until the securitization market comes back. Balance sheets are limited, so we’re not talking about a huge volume of loans here.
New Guidelines for DSCR Rental Loans
The lack of liquidity in the capital markets means that lenders have to tighten up their guidelines and only originate loans with the lowest risk. They are not considering any borrowers with average credit. The minimum FICO score for most lenders is 700. And for cash out refinances, some lenders are requiring their borrowers to have cash reserves. So the idea here is that they don’t want to lend to real estate investors that have no liquidity and want to use the equity from their rental property to pay for living expenses.
Most lenders are maxing out a 75% loan-to-value for DSCR rental loans. In the past, the maximum was 80% LTV. Some lenders are rejecting DSCR loans for rental properties in markets that are experiencing large price declines, including Boise, Austin, Phoenix and others.
Many lenders are avoiding short-term rental properties located in secondary and tertiary markets, unless the investor operates multiple STR properties. Investors that are new to short-term rentals may have a tough time getting financing, and/or they will pay a much higher interest rate.
DSCR Interest Rates as of 2022 Q4
Interest rates for DSCR rental loans are currently ranging from 7.5% to 9.25% for most lenders. The good news is most lenders don’t expect DSCR interest rates to increase much in the near future, even if the Federal Reserve increases rates during the first quarter of 2023. The bad news is most lenders don’t expect rates for DSCR rental loans to come down any time soon.
Tips for Getting DSCR Loans in 2023
One way to reduce the interest rate is to buy it down by paying a higher origination fee. For example, if you get a quote for 7.5% plus 2 points origination fee, the lender may reduce the interest rate by 0.25% or 0.5% if you were to pay 3 points in origination fees.
And you may want to consider a shorter loan term. In addition to a 30-year term, many lenders are now offering a 3-year or 5-year loan term, but the prepayment penalty is always a concern with long-term rental loans. If you’re anticipating that the interest rates for DSCR loans will come down in the next 2 years and you can eventually refinance with a lower rate, you may be thinking of getting a short-term bridge loan for 2 to 3 years instead of a long-term loan with a big prepay penalty.
One solution to this dilemma is to buy down the prepayment penalty with a higher interest rate. For example, if you receive a quote for 7.5% with a 3-year prepayment penalty, you could possibly increase the rate to 8% in exchange for a 2-year prepay. The higher rate for the long-term loan will most likely be 1% to 3% lower than the interest rate for a short-term bridge loan.
How to Find Active DSCR Lenders
Interest rates and guidelines for DSCR loans are still changing quite frequently these days, but many lenders are still actively closing deals. You can find many active direct lenders here on our website. All the private lending companies listed have a detailed profile that shows their guidelines for long-term rental loans. We offer 2 methods to connect with lenders.
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. Send an email, call, or visit their websites.
- Start at the Long-Term Rental Lenders page
- Type in a state or major metro area, and click SEARCH
- Click REFINE RESULTS in the Filters section if needed
- View each lender’s profile to learn about their guidelines, pricing and more
- Click the green CONTACT button and reach out to the lender directly
The companies listed pay us a monthly advertising fee, so there is no cost to make contact with them directly. Please remind each company that you found them on PrivateLenderLink.com.
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.