The best(recommended) time to shop around?

Question

After engaging with a few lenders for a DSCR loan, I decided to go with one of them. After informing the other lenders that I had made a decision not to go with them, they came back with additional information. When is the best time to shop around for lenders—while searching for a property or after finding one? What would you recommend if the other lenders, whom I initially decided not to use, want to beat the rate I’ve chosen, assuming the timeline is not an issue?

Erik Estrada · Answer

I guess this really comes down to what is an accurate and fair quote to the borrower? They are always going to look for the skinniest margin and call the next guy to see if they can do better than the last. What is the middle ground where the borrower is happy with pricing and the broker/loan originator can keep their lights on? At the end of the day, this is a business. We don't originate loans for free. Are we really going to cut our comp down to $500 bucks on a deal that will take 30 days to close?

I don't think it's about "getting caught". There was no secret to begin with. Most reputable lenders will disclose their pricing and profit to the borrower upfront. It comes down to what is a fair compensation to a loan originator and what is a fair rate for the borrower.

Most clients that shop, are looking for a win-lose situation. This will most definitely attract bad players, especially in an unregulated space like DSCR and Hard Money. There will always be that salesman that says no points with a bottom barrel rate to get the deal in. Once the appraisal is completed, the due diligence is wrapped-up, and a day before closing, the borrower gets the bad news...

As a client/borrower, I think it's better to be upfront with your ask, instead of anticipating a lender to cut you any favors. This is a business, not a charity.

Stacy Raskin · Answer

It's best to discuss with lenders the closer you are to making a decision. After you have a property identified is better since rates can change very frequently. Also, DSCR loans aren't regulated the same way so the rates and terms can change last minute- even right before closing (versus in conventional loans that's not allowed). It's important to work with someone who's reputable for DSCR loans because of that. Also a rate is just a quote until a loan is locked which is usually a 30 day lock so it's really doesn't mean anything until the rate locks.

Some investors wait to lock the loan until they get the appraisal back since if they have to do work on the property to close the loan and it goes beyond 30 days, the investor will generally have to pay rate lock extension fees. The property appraisal has to be marked "as is" by the appraiser and not "subject to" doing whatever repairs that are needed to close. If marked "subject to" the work needs to be done and the appraiser has to go out and verify the work is done and submit a report addendum.

Mortgage brokers who specialize in DSCR loans can be helpful since they have relationships with DSCR lenders. DSCR lenders generally are not advertising directly to the public so having a mortgage broker with established relationships can help you get better terms such as lower down payments and better guidelines that benefit the investor. Generally companies like credit unions, lenders who specialize in conventional loans and big banks are not the best for DSCR terms since they generally may not be selling off their loans at the end to replenish their cash versus DSCR lenders have investor pools that are buying the newly closed DSCR loans and that replenishes the cash for new DSCR loans. That's why you want a niche DSCR lender.

More on DSCR loans: DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. Here's a bit more in detail about how rates are calculated for DSCR loans:1. Credit score- the higher the better. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs. I've included an example below to help illustrate this.So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.See example below:DSCR < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to connect to discuss further.

Deborah Wodell · Answer

If the other lenders come back with better terms after you’ve chosen one, it’s worth looking at, especially if the timeline isn’t tight. Just make sure you’re comparing apples to apples, closing costs, prepayment terms, and any fees can make a big difference beyond just the interest rate.

Henry Clark · Answer

OP.  Develop a relationship and stick with them.  Rate variations should be a minimal point.  There should be no follow up information they bring to the table.

Jay Hurst · Answer

as most good lenders, I give me best offer the first time I am asked, and I train by LO's to do the same. For the life of me, I do not understand why borrowers reward lenders who intilaly tried to make a mint off the borrower but then when "match" what another lender offers. That means they were trying to make more then they should have hoping they would not shop but got "caught", and had to lower their margin to market. Why would a borrowerr go back to that lender?

Tomoko Hale · Answer

I had too many questions to ask since this was the first DSCR loan for me to look for and Fortunately, I was able to find one the one who answered my questions in timely manner and went beyond so I was very happy about them. They encouraged me to shop around instead of the attitude not to talk to others or we are the cheapest one.

Thank you for your comment!

Trevor Higgins · Answer

So I would agree, it is always best to develop a relationship with a lender however, the key to shopping lenders is making sure you have an apples to apples comparison.

What I mean by that:

- Quotes are generated on the same day (rates change daily, sometimes during the day)

- You understand ALL the fees involved (broker's have additional fees so their rate might not actually be as good as you think - this is typically called "Buyer Paid Compensation")

- You only compare lender fees and rates, the other fees (title company, taxes, insurance, etc) will be the same regardless of what lender is used as they are non-lender dependent fees.

- Make sure you know what type (if any) of pre-payment penalty is being added as most brokers will start with around a 2 year PPP. This can drastically change the rate depending on the scenario.

- Also make sure all lenders are quoting you with an ACCURATE DSCR ratio and property type as this can also make 1 rate look better than another.

The last thing I want to hear are clients that thought they were getting a better rate with another lender until they get closer to closing and things change. Unfortunately, there are plenty of brokers and loan officers that are transaction focused and can be misleading when presenting an offer.

Erik Estrada · Answer

I think the ideal way to shop, is to set an expectation based on your own investment analysis. If 6.5% with 1 point cost works for your model, lead with that first. It will either be a yes or a no instead of going back and forth with multiple lenders.

The most common mistake I see are inexperienced borrowers calling 100s of lenders to get bottom of the barrel pricing. It may work for a couple of deals here and there, but you will get burned eventually...

Instead, lead with your ask, and see who is able to meet your expectation. If 3 lenders can match your pricing request, then see if you can work a deal. Simple.

Tomoko Hale · Answer

Thank you so much for the info. Yeah I didn't want to call too many so I had three! like you said!

Jay Hurst · Answer

I think you are making my point for me. I quote what is fair for both my organization and the borrower. if someone wants to raise the bottom I let them do it.

The best(recommended) time to shop around?

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