DSCR Rental Loan Interest Rates

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 31st, 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, we 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. 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.

  1. Start at the Long-Term Rental Lenders page
  2. Type in a state or major metro area, and click SEARCH
  3. Click REFINE RESULTS in the Filters section if needed
  4. View each lender’s profile to learn about their guidelines, pricing and more
  5. 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.

Browse Lenders 

 

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.

Get Started

Interest Rates for Private Lending (short-term loans)

Private mortgage lending is mainly for short-term financing secured by commercial and residential investment properties with loan terms ranging from 6 months to 2 years, and that’s what we’re focusing on in this guide. We wrote a separate guide to cover interest rates for long-term loans which many private lending firms now offer with terms ranging from 3 to 30 years.

Short-term private lending includes purchase or refinance bridge loans, value-add, fix & flip, rehab to rent, and ground-up construction. From 2017 to mid-2022, the interest rates for these loans have ranged from 7% to 10%, for the majority of lenders. A small percentage of private lenders have charged 11% to 13% over the past few years, but that’s typically for deals that the majority of private lenders won’t consider, including vacant land, high leverage, small loan amounts, rural locations, specialty property types, and others.

How Much Private Lending Rates Have Increased in 2022

By the end of June twenty twenty two, the majority of private lending companies increased their interest rates by 1.5% to 2%. In July, there were additional increases, so the new interest rate range for short-term private lending is 9.5% to 13%. You may still find some lenders lending at 8-9% range in select regions, but they will likely increase their rates soon to keep up with the competition.

Some lenders are going to increase their rates at a much slower pace than others. This varies depending on the lender’s capital structure and their cost of capital. We wrote another guide to explain the disparity in rate increases among private lenders, and we encourage you to read it, but here’s the short version:

The majority of private mortgages that have been funded the past several years have been sold to the secondary market. Lenders that sell their loans have had to increase their rates by a greater amount, and at a faster pace than lenders that don’t sell their loans. The lenders that hold their loans have not had as much pressure to increase rates, but most have increased by half to one percent so far, and they will likely increase more over the next few months.

Interest Rate Prediction for Q4 2022

This guide was published the first week of August 2022, less than 2 weeks after the Federal Reserve increased rates for the 4th time this year. We haven’t yet seen the effects on private lending rates since that recent July rate hike, but perhaps it was already baked in since everyone was expecting it. Everyone in the lending industry is also expecting the Federal Reserve to add one more rate hike in September. Based on what we’ve seen in our industry thus far, here’s our prediction for where rates will end up by the end of 2022.

We believe the new short-term private lending interest rate range will be 9.5% to 14% for the majority of private lenders, with the average rate being 11% for the majority of loans secured by both residential investment properties and commercial real estate. We’ll see what happens after the next Federal Reserve meeting, and we’ll provide another update in the fourth quarter.

How to Find Private Lenders (companies) and Current Interest Rates

The interest rate hikes have been a huge blow to real estate investors, but many are coping with the new reality, and deals are still getting done. If you’re seeking private financing for a real estate deal and if you want to keep up with private lending interest rates, use our website as a resource. All the private lending companies listed have a detailed profile which shows their minimum and maximum interest rate; most lenders have updated the rates on their profile, and we are reaching out to the rest of them to get their new rate range. 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. Send an email, call, or visit their websites. First select a loan type, then enter the state or metro area where the property is located. A few loan types will show lenders that provide short-term bridge loans:

  • Private Money
  • Hard Money
  • Residential Bridge
  • Residential Fix & Flip
  • Residential Rehab & Rent
  • Residential Ground-Up Construction
  • Commercial Bridge
  • Commercial Property Value-Add
  • Commercial Ground-Up Construction

Browse Lenders 

 

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.

Get Started

Private Lending Interest Rate Increase Explained

The reason many private lenders increased interest rates is because their cost of capital went up when the Federal Reserve started to increase the fed funds rate in mid-2022, in an effort to fight inflation. Before explaining what I mean by cost of capital, I have to first explain the various business models used by private lenders, as it relates to their capital structure for short-term loans. That will help you understand why some private lenders have lower rates than others, and why some lenders move their rates faster than others.

Selling Loans to the Secondary Market

The most popular business model in private lending today is for private lenders to fund a loan and sell it to the institutional secondary market, which includes loan aggregators, private equity, hedge funds and other investment firms. For simplicity’s sake, we’ll just refer to the secondary market as “Wall Street.” So the lender has the money on their balance sheet to fund the loan, but shortly after closing, they sell the loan to Wall Street, make a profit, and recoup their capital so they can fund more loans.

The interest that lenders charge is based on the rate that Wall Street will buy at. Prior to mid-2022, Wall Street was buying short-term private mortgages for around 6% to 7%, and lenders typically mark that up by 1% to 2%. When the fed funds rate went up, it caused Wall Street to increase their buy rate, and lenders were forced to increase the interest rates charged to real estate investors, due to the increase in their cost of capital.

Mortgage Funds

The second most popular capital structure in private lending is to manage a mortgage fund. The lender pools money from many individual accredited investors, and they hold the loans for the entire term. The interest charged to real estate investors is distributed to the fund investors minus a management fee or performance split. Most mortgage funds are not directly affected by the federal funds rate and are not forced to increase their interest rates. Fund managers will likely only take action when they see that most of their competitors have increased their rates, and/or when their fund investors demand higher yields. Some fund managers won’t make any changes to rates, and some have always had higher rates than the Wall Street backed lenders.

Balance Sheet Lending

The next most popular capital structure in private lending is to use a bank credit line, or a warehouse line, and hold the loans for the entire term. The lender borrows money from a bank or other institution, and makes a spread on the interest rate charged to real estate investors. Lenders using this model won’t be forced to increase their interest rates until the bank increases the rate on the credit line, which could take years since many credit line rates are locked for a period of time. However, there is a possibility of a credit line getting cut off.

Table Funding

Another capital structure in private lending is table funding, where the lender doesn’t use their own balance sheet to close the loans. They underwrite the loans and present to a wealthy individual investor who wires the funds at closing and collects the interest payments. Lenders using this model may not increase their interest rates unless their mortgage investors demand a higher yield. Now some lenders get table funding from a private equity firm that relies on Wall Street money. In those cases, their rates are moving according to the fed funds rate.

Sell to Individual Investors

The fifth and final private lending capital structure we’ll mention is similar to the Wall Street model, but the loan buyers are individual investors. The lender will use their own balance sheet to fund the loan and shortly after closing, they sell the loan to an individual investor, make a profit, and recapitalize so they can fund more loans. The rate movement with this structure is similar to mortgage funds and table funding; it likely won’t change unless the individual investors demand a higher yield. And this may not happen until there are other alternative investments available to them which offer a higher yield and a similar risk profile.

Conclusion

By sharing all of this information, we are not suggesting that you ask lenders about their capital sources. The complicated part of all this is many private lending companies use multiple capital sources, financing structures, and business models. Some lenders sell their loans to Wall Street and also manage a mortgage fund. A lender could sell half of their loans to Wall Street and sell the other half to individual investors, while also managing a fund. Some lenders use all the capital structures mentioned, and most lenders have a credit line.

The point is just to understand why there is a disparity in the interest rates you see offered by various private lending firms. That said, the interest rate disparity in private lending has existed since 2015 when Wall Street entered the space and provided the capital for lenders to fund the majority of real estate investors deals throughout the country. The cheap capital caused by low interest rates enabled Wall Street to offer a lower cost of capital which pushed private lending interest rates down, and most of the lenders with other capital structures were forced to lower their rates in order to compete. Since Wall Street capital is getting more expensive, it may provide other types of capital the opportunity to increase rates and get a higher yield.

How to Find Out Current Private Lending Interest Rates

If you want to keep up with private lending interest rates, use our website as a resource. All the private lending companies listed have a detailed profile which shows their minimum and maximum interest rate. In some cases the range is skewed by lenders that offer long-term rental loans, but most of the lenders only offer short-term financing up to 2 years. Contact each lender directly, and if you’d like some recommendations, use our Loan Request system.

Interest Rates for DSCR Long-Term Rental Loans 2021 Q4

While attending the IMN Single Family Rental Conference, we interviewed Jeffrey Tesch, CEO of RCN Capital, to get more insights about how the interest rates for these rental loans are determined, and what the typical rates are. RCN is one of the largest private lending companies in the country, and one of the top originators of long-term rental loans.

Interest Rate Range for 30-Year Rental Loans in 2021

  • 3.75% to 5.0%

Factors That Determine the Interest Rate for Rental Loans

  • Debt Service Coverage Ratio
  • Borrower’s Credit Score

Long-term rental loan rates move similarly to consumer mortgages since the majority of them are sold to the secondary market and securitized. While the interest rates for DSCR rental loans for RCN Capital and other lenders range from 3.75% to 5% as of December 2021, many people in the private lending industry expect the Federal Reserve to increase the Fed Funds Rate in early 2022.

How to Find Direct Lenders for Long-Term Rental Loans

If you’re seeking long-term financing for a residential rental property, use our website as a resource. There is no fee to search, and we have a select group of reputable private lending companies listed.

  1. Start at the Long-Term Rental Lenders page
  2. Type in a state or major metro area, and click SEARCH
  3. Click REFINE RESULTS in the Filters section if needed
  4. View each lender’s profile to learn about their guidelines, pricing and more
  5. 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.

Origination Fees (Points) for Private & Hard Money Loans

What is an origination fee? 

The origination fee in a private mortgage (AKA hard money loan) transaction is a percentage of the loan amount which the lender charges just for originating the loan, which includes sourcing the deal, underwriting, processing, and all the other work involved in closing a loan. The origination fee is a profit for the lender, and without it, they would not be in business.

Origination Fee is Also Known As Points

Origination fees are more commonly known as “Points,” which is the term that most mortgage professionals use in conversations and advertising. The term “origination fee” is more formal and typically mentioned on the term sheet, loan documents, and settlement statement. You won’t hear a lender saying “We charge an origination fee of two point five percent of the loan amount.” Instead, they will likely say “we charge two and a half  points.”

Origination Fee is Also Known As Basis Points

In commercial real estate deals, a lot of lenders and brokers use the term “basis points” which is just a different way of stating the percentage. So an origination fee of two and a half points may be stated as “250 basis points” or “250 bips” for short.

What are the typical origination fees for private mortgages?

In general, the typical origination fee for private lending (hard money) ranges from 1 to 4 points, and it can vary based on a number of factors, including the loan amount, the loan type, property type, location, and the borrower’s financial situation.  The majority of lenders charge between 2 and 3 points.

You may find some lenders that charge 1 to 1.5 points, but this is not common. There are a few scenarios in which private lending companies may charge less than 2 points:

  • Large loan amount, over $2,000,000
  • Low Loan-to-Value
  • High volume property investor doing many loans with the same lender
  • Mortgage broker working with a lender that offers a wholesale pricing program

On the high side of the spectrum, you may find some lenders charging up to 4 points because of a low loan amount, or if the loan has a higher risk profile which many other lenders won’t consider. Some examples include:

  • Rehab loan with high leverage (95-100% financing)
  • Land Loans
  • 2nd Mortgage
  • Rural Location
  • Unique Property Type

If a lender doesn’t have a lot of competition for the type of loan you’re seeking, they may charge higher origination fees just because they can.

There may be some cases where a lender would charge up to 10 points on a loan, but that’s likely to be for loans under $50,000. There are not many private lending companies out there that will fund less than $50,000, but we do have a handful listed on our website. For residential investment properties, most of the lenders in our network have a minimum loan amount of $100,000.

Origination Fee / Points Charged by Mortgage Brokers

What if you’re working with a mortgage broker and not directly with the lender? Mortgage brokers also charge an origination fee. As with lenders, the broker’s fee may vary based on the loan amount, but in general, most mortgage brokers charge 1 or 2 points for private money and hard money loans.

The broker’s origination fee may also depend on how many points the lender is charging. If a lender charges 2 points, the broker will typically be limited to charging 1 or 2 points. In many cases, the broker may not be allowed to charge more points than the lender’s origination fee. It typically has to be less or the same. We’ve seen some lenders have the policy to cap the total number of points that a borrower would pay, and those lenders may be flexible with their points to make sure the broker also gets a fair compensation.

There are some cases where the broker charges points, and the lender doesn’t charge any points at all. You typically see this happen when the lender is a high net worth investor or a family office investment firm that does not participate in the origination process because they are not qualified to, or because they don’t have a license and are not permitted by state law to collect an origination fee.

How to Avoid Paying an Origination Fee

If you are adamant about not paying any points, you may be able to negotiate with the lender to eliminate the origination fee and charge a higher interest rate instead. For example, if a lender quotes 8% plus 2 points, you can ask for 11% and 0 points.

This would only make sense if you’re positive that the loan will be paid off in a short period of time, but it also has to make sense for the lender, and there would likely be a minimum interest guarantee. Only a  small percentage of private lending companies may consider this. Before you ask for this, run the numbers to confirm that it makes sense for your deal.

Origination Fee Structures

The lender charging the lowest number of points may not be the lowest-priced loan. There are many different ways in which lenders structure their deals, and there may be other fees charged in addition to points. Below is an example of 2 different origination fee structures.

Lender A
Loan Amount: $200,000

  • Origination Fee: 2 points
  • Underwriting Fee: $1,000
  • Processing Fee: $500
  • Loan Docs Fee: $500

Total Fees: $6,000

 

Lender B

Loan Amount: $200,000

    • Origination Fee: 3 points
  • Additional Fees: NONE

Total Fees: $6,000

In the example above, both lenders are charging the same amount of fees, but structured in a different way. Don’t write off a lender just because their points are higher than other lenders. You have to dig a little deeper and look at all the other fees the lender is charging.


How to Find Direct Private Mortgage Lenders

If you’re looking for a private lender to fund a specialty commercial property, use our website as a resource. There is no fee to search, and we have a filter you can use to find out which lenders consider specialty properties.

    1. Start at the Find a Lender page.
    2. Type in a state or major metro area, and click SEARCH.
    3. Look for the Points percentage range on each lender’s card in the search results.
    4. View each lender’s profile to learn about their guidelines, pricing and more. You’ll also find the Points range on the lenders’ profile, close to the top.
  1. 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 through our website. Please remind each company that you found them on PrivateLenderLink.com.

Interest Rates for Residential Construction Loans

Ground-Up Construction financing in the private mortgage world used to be difficult to find, and offered only by a small number of hard money lenders that had the risk appetite and the expertise to manage them. And most lenders would only consider construction projects in their local market where they have boots on the ground, so in case of a default, they would be able to take over the project and take it to the finish line.

Real estate investors that built single family homes or small residential developments from 2011 to 2020 could typically expect to pay around 10% to 13% interest plus 2 to 4 points (origination fees).

However, the post-pandemic housing boom created a huge appetite for new homes, and Wall Street saw an opportunity. Institutional capital had already flooded the private lending space before 2020, but it was mainly focused on fix & flip loans, and construction was a very limited offering.

In early 2021, capital providers got more comfortable with construction lending and opened up the floodgates. All the additional capital paved the way for ground-up construction financing to go mainstream, on a national scale.

In May 2021, private lending companies listed on our website were advertising interest rates as low as 8% plus 2 points for ground-up construction loans. This pricing is similar to what many lenders charge for fix & flip projects, or a refinance bridge loan with no value-add.

And the lender doesn’t even have to be local with boots on the ground. They can use third-party construction management firms to oversee the project and inspections across the country.

Another thing that’s remarkable about the new construction financing programs from private lenders is it could include the land purchase and horizontal development. Historically, most lenders would not even talk to a developer until a project is  shovel-ready. Now there are many financing options to purchase land, get it entitled, and break ground all with the same lender.

Why Interest Rates for Construction Dropped in 2020

For those who are not familiar with the whole institutional capital thing in private lending, We’ll provide a very brief explanation of how it works. Many real estate investors and brokers may not be interested in this, but it’s helpful to know because it will have an effect on pricing and lending guidelines in the future.

All of those smaller local private lenders that have offered ground-up construction loans for many years are likely managing a small mortgage fund backed by individual accredited investors, or they use a bank warehouse line to recapitalize. But being able to offer construction loans on a national scale is made possible by one of two capital structures.

The first one is a mortgage fund that has been able to attract so much capital from hedge funds and private equity firms, and grows so large that they have no choice but to go national. There are only a handful of construction lenders in this category, and some of them offer wholesale partnerships with other lenders.

We know one private mortgage fund that grew so large, it became a publicly traded REIT. That company is 100% focused on construction loans, and their pricing has been similar to the small local lenders because they haven’t had much competition the past several years.

What really pushed down interest rates for construction loans in late 2020 is the secondary market. What that means is many lenders are funding a construction loan and selling to an institutional note buyer that acquires hundreds of loans from private lenders across the country. So as long as there is a large appetite for construction loans from these Wall Street backed firms, there will be lots of competition for ground-up construction financing.

That said, institutional capital moves with the capital markets. When there is a major economic event, the appetite will change, and so will the pricing and guidelines. The small local private lenders are generally more consistent over the long term, but for now, they will likely have to reduce their pricing to compete with the institutional capital.

Ground-up construction financing is extremely risky, and there may be many challenges ahead for lenders if the new housing market cools down. With construction interest rates on par with less risky loan types like fix & flip or rental bridge loans, you have to wonder if this is just temporary, or if it’s the new normal. Whatever, the future holds, the lower pricing is great news for real estate investors who are building new homes.


How to Find Residential Construction Lenders

You can find direct private hard money lenders right here on our website, and we have a filter you can use to easily find out which lenders consider vacant land.

  1. Start at the Find a Lender page
  2. From the Loan Type list, select Residential Ground-Up Construction
  3. Type in a state or major metro area, and click SEARCH
  4. Browse the list, and use the filters to refine the results
  5. View each lender’s profile to learn about their guidelines, background and more
  6. Scroll down to find the Construction Loan Criteria section. The rates and fees at the top of the page may apply to different loan programs.
  7. Click the green CONTACT button and reach out to the lender directly