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Once a full application and credit authorization has been received, DCSR Lenders will pull the credit reports and background checks and do some preliminary checks and analysis to move forward in the process. When the credit reports and background checks yield no “surprises” (i.e. lower than expected scores or any credit issues or background report flags), it is a pretty quick and orderly process to receive what is typically called a Term Sheet or sometimes Letter of Intent (“LOI”) where the lender lays out the loan terms that both parties (borrower and lender) are agreeing to. Note that these terms are typically non-binding and come with all sorts of disclaimers, including language around how the key metrics of LTV and DSCR ratios are dependent on the findings of the third-party appraisal, which comes later in the process. This Term Sheet or LOI document is the DSCR Loan equivalent of the conventional loan “Loan Estimate,” but is less standardized among lenders and includes information tailored around the unique circumstances of rental property loans and DSCR financing nuances.
Since DSCR Lenders (and all mortgage lenders) utilize alternative real-estate focused versions of credit scores and reports, it’s not uncommon for there to be some issues found in this part of the process. Examples include the official hard credit score falling into a different FICO “bucket” than originally anticipated (this is usually a lower bucket, but sometimes it comes into a higher bucket too, in these cases, you can likely get slightly better terms than what was quoted!).
Other issues could be items on the credit report such as credit events or mortgage lates that weren’t previously disclosed, or things that the lender just needs further information and clarity on. Non-real estate delinquencies and liens and judgments that show up typically get flagged here, and unless they are so large as to make paying off unfeasible, they are usually just noted as a requirement to pay off and clear before loan closing. If the credit report shows a different median qualifying credit score, then this stage will be paused while the investor (borrower) and their account representative rework the pricing and terms based on the updated FICO information. This process shouldn’t take too long, especially for borrowers who have taken the time to have a good understanding of the mechanics of DSCR Loan pricing and rate sheets.
Generally, background reports will not show anything that jeopardizes qualifying for the DSCR Loan, but a criminal record or other blemishes will typically first appear at this stage. Anything fraud-related (mortgage fraud in particular) is an immediate disqualification, however serious criminal convictions, especially if a long-time in the past (like more than a decade) are not always an impediment as long as they are well in the past and accompanied by a letter of explanation showing how the individual has changed and repented for past mistakes.
The best DSCR Lenders will do a robust and detailed review of credit and background at this stage in the process in order to flag and evaluate these issues early on in the process so that if they are truly disqualifying, neither borrower nor lender wastes time and money by continuing on a loan that can’t close. In cases of significant findings, it’s usually worth a conversation about the issues, a game plan for resolution and understanding exactly how (and if) they will affect rate, terms and qualifying.
All in all, most DSCR Lenders should be able to “turn” a completed application and credit authorization into an officially presented Term Sheet within about 24 hours or within the same or next day after receiving the application. While these documents are always non-binding, these term sheets will typically be signed by both lender and borrower to signify the commitment to continue.
One of the most misunderstood and confusing aspects of DSCR loans involves rate locks. At a high level, a rate lock refers to “locking in” or obtaining a commitment for a specific interest rate at the beginning of the loan process, typically a day or so after application. For DSCR Loans, this initial loan cycle often runs 21 to 45 days from initial quote to a successfully closed and funded loan.
Because the market-driven component of mortgage rates, i.e. the “base rate stack” tied to broader market conditions can fluctuate daily, and because some DSCR Lenders publish new rate sheets every business day, a rate lock provides important protection. It allows the borrower to secure a specific day’s rate for a set period (commonly 15, 30, or 45 days) and gain certainty over the loan terms as the process unfolds.
Many misconceptions occur when comparing DSCR Loans to conventional or other DTI-based loans. In conventional lending, qualification and terms can be almost entirely confirmed early in the process because the loan is primarily underwritten on the borrower’s income, expenses and credit profile. Once the application and credit report are reviewed, the Loan Estimate will reflect the interest rate and points that will remain fixed, assuming the loan closes within the lock window.
In contrast, DSCR Loan qualification and pricing are significantly impacted by the appraisal and other developments that occur later on in the loan process. It’s not just a matter of the appraisal’s property valuation (which can significantly affect pricing and qualification by changing the loan’s very impactful final LTV ratio “bucket”), but other aspects as well such as rural-determination, property condition and particularly the market rent analysis that’s often utilized in the DSCR ratio calculation. Because of this, the final DSCR ratio bucket, (particularly if the DSCR ratio above or below a key threshold like 1.00x) can change once the appraisal is completed, often triggering a change in the final interest rate and/or closing fee.
DSCR Loans also offer more borrower-controlled flexibility than conventional mortgages. Investors can adjust the trade-off between interest rate and closing costs, change prepayment penalty structures, or select different loan structures such as Partial-IO or Hybrid (Fixed to ARM) options, sometimes late in the process. Adjusting terms throughout the process is not uncommon, as it’s a frequent response when needing to adjust loan structure based on finalization of data, such as when a lower appraisal-determined market rent or higher than estimated insurance quote requires the DSCR ratio to slip below the number needed to qualify.
Each of these changes, such as choosing different loan levers to pull and their associated LLPAs, can change interest rate, but keep overall “pricing” the same, i.e. generating the same premium. An example would include a set of DSCR Loan quotes that include an option at a 7.000% interest rate with a 5/4/3/2/1 prepayment penalty and an option at an 8.000% interest rate with no prepayment penalty, if the borrower wants to keep both options open to decide later on in the process, that would preclude locking to a specific rate (since there are multiple options with different rates from the same rate sheet). Thus, it doesn’t make sense to lock an interest rate specifically for DSCR Loans, since terms can (and frequently do change), both to respond to underwriting or just change in preference.
However, this also creates a problem, especially in markets of significant rate volatility, where market rates can increase significantly in just a few weeks. Many borrowers can face the risk of rising rates hurting their deal economics or even making the loan unfeasible by the time the loan process concludes, and seek to take interest rate risk off the table, or “lock in” a rate so that they have certainty that spikes in market rate over the period between application and loan close (usually around a month) won’t affect terms. But due to the inapplicability of locking specific rates for DSCR Loans, a simple “rate lock” like those in conventional mortgages doesn’t really work. However, there is a solution offered by some DSCR Lenders, that is, to lock to a “rate sheet” rather than locking to a “rate” itself.
For DSCR Loans, a “rate lock” means the DSCR Lender is fixing the base rate stack from a specific day’s rate sheet, not guaranteeing a single final rate. That locked day’s market-based pricing layer will be used for re-pricing if terms change later, whether due to appraisal-driven adjustments or the borrower simply changing their mind on terms and tradeoffs. In most cases, the lender’s Loan-Level Price Adjustments (LLPAs) from that day will also still apply, unless the lender has updated them (which is far less frequent than changes to the base rate stack).
Suppose you lock on August 2, based on your preferred mix of interest rate, points (closing fee) and terms. Two weeks later you decide to buy down since the originally chosen rate and the appraisal’s market rent figure pushes your DSCR ratio into a lower bucket. The DSCR Lender will re-price the loan using the August 2 base rate stack and applicable LLPAs, rather than the August 16 rate sheet (and new market “base” rate stack).
A DSCR Loan rate lock protects borrowers from market interest rate increases, but it is not a guarantee of the final interest rate, which is a “good thing” for borrowers since it indicates flexibility rather than rate rigidity. The final interest rate may still change if the property’s appraisal shifts the LTV or DSCR bucket, or if simply a choice is made to alter loan structure, points or terms. Understanding this distinction, locking to a “rate” vs. locking to a “rate sheet,” is essential for serious real estate investors aiming to master DSCR Loans and fully understanding all the tradeoffs, risks and tools.
While there will almost never be any upfront fees or costs associated with DSCR Loans during the first stages of getting quotes or submitting an application, the potential for an upfront fee, including non-refundable fees for DSCR Loans can occur at this stage: during the issuance of a Term Sheet or LOI after processing the application and credit report. While conventional and other non-DTI based non-QM loans will rarely have any upfront fees, these might be present for DSCR Lenders. The reason is similar to the reasoning behind rate locks discussed in the section above, there is much more certainty of terms and a successful close upfront if the qualification and underwriting is primarily based on the borrower or DTI (information readily available at the beginning) versus if qualification and underwriting is primarily based on the property or DSCR (when key information only comes after the appraisal, later on in the process).
This is one of the reasons that DSCR Loans can fail to close more often than conventional loans as the process plays out. There are a significant amount of costs and fees incurred by DSCR Lenders throughout the process such as legal costs (to generate loan documents and/or review entity documents), valuation costs (such as appraisals and CDAs) and title commitment costs that are typically paid at closing by the borrower or seller or combination thereof. However, if a loan doesn’t end up closing for whatever reason, the DSCR Lender will have to pay for all of those costs that have been incurred, without the reimbursement or any revenue generated since the loan never closes.
For this reason, some DSCR Lenders will have an upfront fee or deposit to help cover those costs in case the loan doesn’t occur or to protect their ability to operate profitably by ensuring operational costs can be covered. Additionally, the payment of an upfront fee, especially when paired with a rate lock (or more accurately locked to a rate sheet / base rate stack) can help prevent the borrower from shopping and switching lenders mid-process, leaving the lender holding the bag with all of the incurred fees and no way to recoup, a big risk for DSCR Lenders operating on tight margins.
For these reasons, some DSCR Lenders will have an upfront processing fee or one that is incurred after the lender issues a Term Sheet but before the lender proceeds with the next stages, such as ordering the appraisal or gathering documents for the loan file. These flat fees are typically neither too heavy nor too minimal, generally falling between around $500 and $1,000. This being said, many DSCR Lenders will not have an upfront processing fee at all, but that doesn’t necessarily mean that you won’t be paying in other ways (such as through higher fees at closing or a higher rate).
Note that for conventional loans, there are very strict regulations regarding the fees incurred for closing costs and other lender or third-party fees, with intensive disclosure and stringent restrictions on any changes or increases from Loan Estimate to Close. While some of these fees change because the exact costs are not always known for a specific property (i.e. title costs, recording fees and specific third-party services), there are some that can be quite subjective and certain unscrupulous lenders could potentially “markup” and collect the excess as profit (sometimes called “junk fees”) such as fees for drafting loan documents or “underwriting.” Since these regulations don’t apply to DSCR Loans, it’s important to understand what each fee entails and covers and that any changes from the term sheet or upfront estimates are clearly explained and justified.
Dodgy DSCR Lenders may also rachet up fees and costs at the end of the process just before close, sometimes called “gotcha fees.” This is an example of what’s called the “hold-up problem,” as these lenders know that a borrower is unlikely to walk away at the finish line and will just absorb excessive mark ups and fees rather than fully canceling a deal. This is because borrowers in this situation would be faced with paying the fees or the alternative, which includes both not getting the property and also absorbing the money and time spent, which can include significant amounts like earnest money deposits and non-refundable option-period fees. For that reason, a fully transparent upfront fee or deposit (to be used in escrow to cover third-party charges like appraisals or actual legal reviews) isn’t necessarily a red flag. Instead, it can be an indication of a more honest DSCR Lender.
Q: What are the upfront costs or fees associated with DSCR loans?
A: While DSCR loans rarely require any payment during the initial quote or application stage, some lenders collect upfront deposits or processing fees, often called a commitment fee or good-faith deposit, after issuing a Term Sheet or Letter of Intent. These fees, which typically range from $500 to $1,000, are used to cover third-party and lender-incurred costs such as appraisals, credit and background reports, legal document preparation, and title work if the loan does not close. Unlike conventional loans, DSCR loans are not bound by strict TRID fee-change limits, so investors should review all lender charges closely, confirm refundability in writing, and watch for last-minute “gotcha fees” or “junk fees” added near closing.
Up Next: Once the term sheet is signed and delivered, you'll get the “Needs Lists” and dive into What Documents are Required for DSCR Loans
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