“Declining Markets” and DSCR Loans

One final property eligibility wrinkle to be aware of as a well-informed DSCR Loan borrower is what it means (and what happens) if your property is classified to be in a so-called “declining market.”  Similar to the rural classification, the market classification (i.e. declining vs. not) varies from lender to lender in terms of eligibility and methodology.  However, it is not typically as common as a source of restrictions as “rural” vs. “non-rural” designations. A good chunk of DSCR Lenders will not treat properties in declining markets any differently.  Most lenders, however, will rely on the “Property Values” row in the “Housing Trends” section in the appraisal (right next to the Neighborhood Characteristics Location section that determines rural vs. suburban vs. urban).  In similar manner to that section’s structure, there are three boxes for the appraiser to check related to Property Values in the property’s market as: 1) Increasing 2) Stable or 3) Declining.  Fannie Mae provides guidance to appraisers that this determination should be supported by market data from the property’s immediate area over the past 12 months with a focus on recent 3–6-month trends.  Appraisers are instructed to focus on trends of sales prices and additional factors like days on market or price increases or reductions to make their determination.

While nearly all DSCR Lenders use a market trends classification as part of their qualification process, some will also include certain states, cities or metropolitan statistical areas (“MSA”s) that their internal team has flagged as “declining” for additional restrictions.  Because DSCR Lenders are private lenders doing business-purpose loans only a lot of regulations aimed at requiring access to all Americans don’t apply, and lenders can have more leeway to exclude lending in certain markets.  In recent years, some DSCR Lenders have added additional markets to their “declining markets” classification (even if not flagged in the appraisal), such as areas that overheated during the 2020-2021 COVID hysteria like Boise, Idaho and Austin, Texas, oversaturated vacation markets during the STR craze in the same years (such as Joshua Tree, California or Smoky Mountains in Tennessee), or even entire states that have a combination of over-regulation (tend to have anti-landlord / anti-lender laws) and recent population losses, such as Illinois or New Jersey.

The good news for real estate investors who have good market knowledge of areas that could be flagged as “declining” is that DSCR Loans on properties in these markets are often still eligible.  Further, they don’t typically come with higher rates or any worse pricing; the only difference will be a minor LTV restriction, such as a lowering of the maximums by 5% (i.e. if the general lender maximum is 80.0% LTV or 20% down payment, then in a declining market, the maximum would be 75.0% LTV or 25% down, with no other restrictions or changes to points or rate).