DSCR Wholesale vs Direct Funding for Loan Originators

The 30-year residential rental loan, also known as DSCR financing, has been a great opportunity for private mortgage lenders to fund more loans over the past 2 years, and the volume was explosive in 2021 as the appetite for these loans from institutional capital has increased and the fed funds rate has fallen to record lows. Many private lending companies originating these loans have to debate whether they want to fund these loans from their balance sheet and sell to the secondary market, or partner with a capital provider that offers a wholesale program to fund the loans.

While attending the IMN Single Family Rental Conference, we interviewed Alex Offutt, Managing Director of Constructive Loans, and asked him to make the argument for choosing a wholesale partnership. Constructive is one of the largest private lending companies in the country for funding and servicing long-term rental loans.

Almost all 30-year DSCR loans end up in a securitization. Therefore, the guidelines are strict and standardized. There is only one company in our network that keeps these rental loans in their portfolio. That company is backed by insurance company capital which likes to hold on to loans for long terms.

DSCR Loan Origination Model #1 – Fund and Sell

Loan originators that have a substantial balance sheet and/or warehouse lines can fund DSCR loans in-house and then sell to the secondary market. The majority of DSCR loans are sold to an aggregator that securitizes pools of notes, and the aggregator services the loans. Some of the larger originators in our space that fund a huge volume of these rental loans will securitize directly and retain the servicing. Direct securitization enables the highest profit margin for originators.

There are a few downsides to this model:

  • Additional overhead expenses
    • Processing and underwriting
    • Post-closing requirements
  • Balance sheet risk of not being able to sell
  • Better execution
  • Slightly better pricing

DSCR Loan Origination Model #2 – Wholesale

Loan originators can partner with a larger lending firm to fund their DSCR loans while still earning origination fees and yield spread. There are a few companies in our space that have the infrastructure and capital to fund DSCR loans in large volumes and offer a wholesale program to originators. The main benefit is not needing a large balance sheet to fund these loans. Plus the wholesale lender handles much of the underwriting and post-closing tasks.

  • There are a few downsides to this model:
  • Most wholesale lenders charge origination fees (not all)
  • Less control of the underwriting and closing
  • Lower yield spread

Some private lending companies will always opt to fund loans using their balance sheet, even if it requires additional costs and resources. And many lenders in our network have no interest in originating DSCR rental loans because it’s so different from short-term lending, and they don’t want to deal with institutional capital providers. However, a wholesale partnership could be a great way to earn additional revenue while these loans are in high demand.

Find Private Mortgage Wholesale Lenders

If you’re a loan originator seeking table funding sources, use our website as a resource. Our Capital Provider Directory has a Wholesale sub-section.

Some companies use other terms used to describe wholesale lending, so go through these other categories:

  • Correspondent Program
  • Table Funding
  • White Label Program

The companies listed pay us a monthly advertising fee, so there is no cost to make contact through our website. Please remind each company that you found them on PrivateLenderLink.com.

Visit the Capital Directory

January 21, 2022