Debt Service Coverage Ratio (DSCR) loans are a unique type of financing used by real estate investors and property developers. Unlike traditional mortgages that rely on the borrower’s income, DSCR loans are underwritten based on the net operating income of the property. Lenders want to see that the property can generate enough cash flow to cover the debt service.
DSCR loans come with their own set of fees and closing costs that are often higher than conventional mortgages. Since DSCR lending is considered higher risk, lenders need to charge more to mitigate that risk. However, fee structures can vary significantly amongst DSCR lenders. Comparing the fee structures is an important part of choosing the right lender.
How Do DSCR Lender Fees Compare To Traditional Mortgage Fees?
DSCR loans will typically have higher origination fees, application fees, and third-party report fees. Origination fees on a DSCR loan can range from 1-5% of the loan amount, while traditional mortgages usually have origination fees under 1%. Application fees, appraisal fees, and environmental report fees may also be higher.
Additionally, DSCR loans often charge points upfront. One point is equal to 1% of the loan amount. Paying points reduces the interest rate, so borrowers can choose to buy down the rate by paying more points. Traditional mortgages may or may not require points.
Finally, DSCR loans have mandatory prepayment penalties. Borrowers usually cannot refinance or repay the loan ahead of schedule without facing a penalty of 6 months interest or more. Traditional mortgages in the UK do not have prepayment penalties.
What Are The Most Common Fees Charged On DSCR Loans?
Here are some of the most common fees charged by DSCR lenders:
Origination & Application Fees
- Origination Fee – Usually 1-5% of loan amount
- Application Fee – £100-£300
- Appraisal Fee – £200-£500
- Environmental Report Fee – £150-£300
- Quantity Surveyor Fee – £300-£600
- Arrangement Fee – 0.50-2% of loan amount
- Exit Fee – 0.50-2% of loan amount
- Solicitor Fee – £500-£1000
- Valuation Fee – £200-£500
- Points – Optional, 1% of loan amount per point
- Annual Review Fee – £150-£300
- Monitoring Fee – £100-£250 per quarter/half year
- Early Repayment Fee – 6-12 months interest penalty
- Mortgage Exit Fee – 0.50-2% of outstanding loan balance
How Do Lender Fee Structures Compare Between Banks, Credit Unions, And Specialty Lenders?
There are some key differences in DSCR fee structures between different types of lenders:
- Lower interest rates
- Higher fees – 2-5% origination, more points
- More stringent underwriting
- Higher interest rates
- Lower fees – 1-3% origination
- More flexible underwriting
- Highest interest rates
- Lowest fees – 1-2% origination, few or no points
- Specialize in DSCR so more flexible
Banks have some of the lowest interest rates but charge the highest fees. Their underwriting is strict. Credit unions offer higher rates but lower fees and are more flexible. Specialty lenders provide the most flexible underwriting but have the highest rates and lowest fees.
How Does The DSCR Ratio Impact Fees And Interest Rates?
- DSCR under 1.0 – High rates, high fees, usually denied
- DSCR 1.0 – 1.25 – Higher rates and fees
- DSCR 1.25 – 1.5 – Moderate rates and fees
- DSCR over 1.5 – Lowest rates and fees
A DSCR under 1 means the property’s income doesn’t fully cover the debt payments. A DSCR of 1.25 would mean the property makes 25% more than the debt payment. The higher the ratio, the more comfortable lenders feel.
What Should UK Real Estate Investors Look For When Comparing Lender Fee Structures?
When comparing DSCR lenders, UK real estate investors should focus on these key factors:
- The rate will significantly impact your monthly payments
- Compare fixed vs variable rates
- Get quotes from multiple lenders
- Points let you lower the rate by paying upfront
- Know how much each point reduces the rate
- Calculate the break-even point
Origination & Application Fees
- Make sure they fit your budget
- Negotiate to reduce or remove them
- Understand the penalty costs
- Factor this into any exit strategy
- Longer terms mean lower payments
- But less principal paydown over time
By focusing on these key variables in the fee structure, real estate investors can determine the best DSCR loan option for their investment property portfolio.
Tips For Negotiating Better Terms And Reducing Fees
Here are some tips investors can use to negotiate better DSCR loan terms and lower fees:
- Shop around – Get quotes from multiple lenders and make them compete
- Ask for discounts – See if they can reduce or waive certain fees
- Buy points – Pay more upfront to lower the rate
- Offer collateral – Provide additional security like a CD
- Pay costs – Offer to pay third-party report fees
- Agree to monitoring – Accept quarterly inspections or reports
- Extend the term – Increase amortization term to lower payments
- Accept variable rate – Take on some interest rate risk
Being flexible on certain aspects of the deal can give you leverage to reduce costs in other areas. The result is better overall terms.
Final Thoughts – Choosing The Best DSCR Lender
Comparing DSCR lender fee structures takes some legwork, but identifying the best fit will save thousands long-term. Focus on interest rate, points, origination fees, prepayment terms, and amortization when evaluating options.
Banks have the lowest rates but higher fees. Credit unions offer more flexibility with higher rates and lower fees. Specialty lenders provide the best underwriting terms with higher rates and costs.
Work to negotiate discounts and buy points to improve the fee structure. UK real estate investors who put in the effort can find great DSCR financing terms despite the fees being higher than traditional mortgages. Partnering with the right lender will lead to long-term financing success.