10 QUESTIONS TO ASK EVERY DSCR LENDER
1. What are you using for the DSCR to Quote this Rate?
The Debt Service Coverage Ration that the lender uses will impact the rate you will qualify for.
Lenders have loan level price adjustments and each piece of information will impact that lenders rates. Some lenders are more conserviative than other, so they may have a larger adjustment to the rate for a 1:1 ratio than another DSCR lender.
Typical ratio buckets would be:
1.5+
1.25 - 1.49
1 - 1.24
.75 - .99
No Ratio
1.5 ratio would mean that for every $1,000 you pay in the housing payment, you are receiving $1,000 in rent.
1:1 ratio would mean that the amount you receive in rent each month is equal to the total housing payment. This would be riskier to the bank, so they would make a rate adjustment to take on this additional risk.
2. What credit score are you using to quote this rate?
The credit score that the lender uses will impact the rate you will qualify for.
Mortgage lenders will pull the 3 major credit bureues Experian, Transunion and Equifax and most lenders will use the middle score of the lowest borrower. However, some DSCR lenders will use the middle score of the highest borrower, so it's important to ask because its one of the largest impacts on the rate you will qualify for.
Borrower will fall into different credit buckets. The higher the credit the better the rate you will qualify for.
Typical credit buckets for lenders would be:
780+
760 - 799
740 - 759
720 - 739
700 - 719
680 - 699
660 - 679
This means everyone with a credit score between 700 and 719 fall into the same credit rate adjustment. Each lender will have their own adjustments and minimum credit scores based on their risk tolerance.
3. Is there a pre-payment penalty?
Most DSCR loans have a pre-payment penalty up to 5 years, so it's extremely important you ask the DSCR lender or mortgage broker if the loan or rate they are quoting or offering comes with a pre-payment penalty.
A prepayment penalty is a contractual clause that states the borrower is going to pay the lender an additional fee if the borrower pays the loan off early. This would include refinancing, so its critical to know what you are locking yourself into.
A common prepayment penalty structure is called a step down or 5/4/3/2/1 structure. This means that if the borrower pays off the loan in year one, they have a 5% prepayment penalty of the remaining loan amount, in year two, a 4% prepayment penalty, and so forth.
If your prepayment penalty structure is a 3/0/0, it means that in the first year you pay a 3% fee, and then the penalty goes away after that. The reason the term "penalty" is not accurate is because it does not necessarily impact your DSCR loan. For instance, investors looking to hold onto their properties long-term are not impacted by the prepayment penalty. Investors who want more flexibility can take a higher interest rate or pay a fee to get rid of the prepayment penalty entirely.
4. What is the underwriting, processing, and origination fee?
Mortgage lenders fees can vary when it comes to underwriting, processing and origination.
Most DSCR lenders charge an underwriting fee between $1,000 - $1,695
Processing fees are not always charged, but a typical processing fee is $795 with many lenders.
Origination fees are not always charged.
If you are working with a broker you will want to know what their fee will be for helping facilitate the loan.
5. Is the lender charging discount points for this rate?
Discount points are essentially mortgage interest that you pre-pay upfront at closing.
Typically, one point costs 1% of the total mortgage, and permanently lowers the interest rate anywhere from 0.125% to 0.25%, depending on the type of mortgage.
One lender may quote a rate and not mention any discount points, but they may be quoting a rate that has addition fees, so make sure you ask!
It's important to remember that your rate or discount for the rate quoted can change if you do not lock the rate of your loan, so make sure you lock your rate if you do not want to risk the fees or rate going up.
6. What are the total fees in section A of the loan estimate?
When you are buying a home or refinancing you can choose your title company and their fees do not change lender to lender.
The place where lenders will vary is in the fees they charge in section A of the loan estimate under origination fees.
If you plan on using the lenders or brokers preferred title company, then you will want to get a fee sheet to compare those fees as well.
7. When can I lock the rate?
It's important to remember that your rate or discount for the rate quoted can change if you do not lock the rate of your loan, so make sure you lock your rate if you do not want to risk the fees or rate going up.
Some DSCR lenders allow you to lock the loan once it is registered and they have a completed loan application, but others may require an initial approval or an appraisal to be completed before you can lock your rate.
8. Will you do a rapid rescore if I could get a better rate?
What is a Rapid Rescore?
A rapid rescore is a tool that helps you improve your credit score quickly. When you click on an increment like plus 20, it reveals the exact steps needed to boost your score and the likelihood of success. This is crucial because your credit falls into specific "buckets" that determine your loan rate. For instance, everyone with a score between 620 and 639 is in one bucket, and those from 640 to 659 are in another.
The Benefits of a Higher Score
Let's imagine your middle score is sitting at 655. By using a rapid rescore to bring it up to 660, you might qualify for a better rate. The difference might seem small, but the savingsare real. A better score can reduce your interest rate, saving you potentially hundreds of dollars each year and thousands over the life of the loan.
Why some Lenders and Brokers don't offer Rapid Rescores
Most lenders don't mention rapid rescores because they can't charge you for it. However, the process does incur a cost. This technique is different from simply paying down a credit card and waiting for the credit bureaus to update your score. With a rapid rescore, you pay down the debt as instructed, provide the necessary documentation, and typically see a score increase within three to five business days.
Step-by-Step to Faster Results
Here's how it works:
Pay Down the Debt: Follow the specific steps recommended by the rapid rescore tool.
Submit Documentation: Provide the necessary proof to your lender.
Wait for the Update: Within three to five business days, the bureaus will update your score.
Recalculate Your Score: Your lender can now use the improved score to qualify you for a better rate.
Improving your middle score from 655 to 660 might seem minor, but the rate reduction can add up, offering substantial savings over the initial years of your loa
9. Will the DSCR interest rate change if you close in a LLC?
Some lenders charge a fee for closing your DSCR loan in an LLC or Entity.
The tricky part is that its not itemized. It's a fee that is built into the rate itself.
For example, lets say you have a $300,000 loan and they tell you the cost in discount points for that rate is .5, so $1,500. A portion of that .5 cost or $1,500 might be for closing in an LLC.
Many lenders do not have a fee for closing in an LLC, so always ask, "Is there a difference in my rate or the cost for the rate if I close in an LLC?"
10. How does your down payment affect your DSCR interest rate?
A larger down payment typically leads to a lower interest rate on a DSCR loan because it reduces the loan-to-value ratio, signaling lower risk to the lender. Additionally, a higher down payment can improve the DSCR by reducing the loan amount, which lowers the debt service required.
Typical loan-to-value buckets for lenders would be:
75.01-80 LTV
70.01-75 LTV
65.01-70 LTV
60.01-65 LTV
50.01-60 LTV
<=50 LTV
This means a property with a loan-to-value between 70.01 and 75 will fall into the same rate adjustment. Each lender will have their own adjustments and minimum credit scores based on their risk tolerance.
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