DSCR Loan Shopping: The Questions to Ask Before You Pay for the Appraisal

Two DSCR lenders can quote the same interest rate, the same 75% LTV, and the same minimum DSCR—and still offer substantially different loans.

The difference often doesn't become obvious until after you've started the process.

Origination points are only the beginning. Underwriting fees, processing fees, document fees, appraisal requirements, reserve requirements and prepayment penalties can significantly change the economics of a DSCR loan. Just as importantly, lenders don't necessarily calculate DSCR or determine qualifying rent in exactly the same way.

That means shopping for a DSCR loan based primarily on the advertised interest rate can be a mistake.

Here are the questions worth answering before you authorize the appraisal.

1. How Does the Lender Calculate DSCR?

A lender advertising a 1.00x or 1.25x minimum DSCR isn't telling you enough.

Find out:

• What rental income will be used?
• Will the lender use the existing lease?
• Will it use the appraiser's market-rent estimate?
• Does it use the lower of the two?
• What expenses are included in the denominator?
• Are taxes, insurance and HOA expenses included?
• Are different calculations used for short-term rentals?

This isn't theoretical.

A change in qualifying rent or expenses can move the property into a different DSCR tier, potentially affecting the maximum LTV, interest rate or even eligibility.

Get the methodology before paying for the appraisal.

2. Who Controls the Appraisal?

Ask a very specific question:

Does the lender require an Appraisal Management Company, or does it permit a direct appraisal assignment?

Also ask:

• Who engages the appraiser?
• Can an existing appraisal be transferred?
• Can the appraisal be reassigned to another lender?
• Is a Form 1007 market-rent schedule required?
• Is a secondary appraisal review, CDA, BPO or other valuation required?
• What are the expected appraisal and review fees?

This matters because the appraisal can become a switching cost.

If underwriting changes the deal after you've already spent money on an appraisal that another lender won't accept, walking away becomes more expensive.

3. What Are All of the Lender Fees?

Don't ask only for the origination fee.

Ask for every lender-controlled charge expected at closing:

• Origination points
• Underwriting fee
• Processing fee
• Administrative fee
• Document-preparation fee
• Legal fee
• Appraisal-review fee
• Rate-lock fee
• Servicing/setup fee
• Any other lender or broker fee

Then convert everything into dollars.

On a $300,000 loan, three origination points alone equal $9,000.

Add another $4,000 in lender-related charges and the borrower is paying $13,000—4.33% of the loan amount—before considering ordinary third-party closing costs.

Suddenly an attractive headline rate may not look particularly attractive.

4. What Is the Prepayment Penalty?

Don't settle for: “Yes, there's a prepayment penalty.”

Get the actual structure.

Common DSCR structures include multi-year step-down penalties such as 5/4/3/2/1 and 3/2/1. Some lenders offer shorter or no-prepayment-penalty alternatives in exchange for different pricing.

Then compare the penalty with your actual investment plan.

If there's a reasonable chance you'll sell or refinance in three years, a cheaper interest rate attached to a five-year prepayment penalty may not be the cheaper loan.

5. How Much Cash Must Remain in Reserve?

Closing costs aren't the only liquidity consideration.

Ask:

• How many months of PITIA reserves are required?
• Are taxes and insurance escrowed?
• How much must be collected upfront?
• Must reserves remain in a particular account?
• Are there seasoning requirements for those assets?

A loan can require substantially more available liquidity than the down payment and closing-cost estimate suggests.

6. What Can Change After the Appraisal?

This may be the most important question of all.

Ask the lender to identify what could cause the quoted:

• Interest rate
• LTV
• Loan amount
• Origination points
• Reserve requirement
• DSCR tier

to change.

Obviously, no responsible lender can guarantee an LTV before verifying the property and borrower.

That's not the point.

The goal is to understand the rules that determine the change.

If a 1.25 DSCR supports 75% LTV but a 1.24 DSCR reduces the maximum to 70%, that's something you want to know before ordering the appraisal—not four days before closing.

Compare the Loan, Not the Rate

A useful DSCR comparison should ultimately answer four questions:

Will they make the loan?

How will they underwrite it?

What will it really cost?

What could change before closing?

The lender advertising the lowest rate doesn't necessarily win.

A slightly higher rate with lower lender fees, a more favorable prepayment structure, predictable underwriting and fewer opportunities for repricing could easily be the better financing decision.

The DSCRDeals Approach

DSCRDeals is working to expand lender comparisons beyond minimum FICO, maximum LTV and advertised DSCR requirements.

We're building deeper lender research around appraisal procedures, DSCR calculation methodology, lender fees, reserve requirements, prepayment structures and other underwriting rules that can affect an investor's deal.

When reliable information is publicly available or confirmed by a lender, we'll include it. When an important term isn't publicly disclosed, we'll say so rather than fill the gap with an assumption.

Because the useful question isn't simply:

“Which lender offers DSCR loans?”

Almost every lender in a DSCR directory can say yes to that.

The useful question is:

“Which lender offers the best structure for this particular deal?”

Disclosure: DSCRDeals may earn a referral fee from some lenders listed in our directory. Referral relationships do not determine the lender information we publish or the results of our research.