A DSCR Loan isn’t just a deal between a borrower and a lender, there are many people and companies involved in a typical transaction, and it’s smart to understand all the players and their roles in the lending life cycle. Each DSCR Loan is different – and not every transaction will have the same cast of characters, but most will have a similar set of people and entities involved, with most of the differences depending on if it’s an acquisition or refinance.
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For acquisition transactions, the process can start either with a lender or with the real estate agent hired by an investor to assist in finding the property to purchase and to handle that aspect of the real estate transaction. Generally, before being able to begin shopping for a new investment property, a pre-approval letter will be required from a mortgage lender. Pre-approval letters from DSCR Lenders are typically much less stringent and can be much more easily accessed than those coming from conventional or other DTI-based lenders. This is because a consumer or DTI-based mortgage lender can generally determine qualification (i.e. what price a borrower can afford) upfront since DTI is assessed regardless of the property and its appraisal results. This is also the case because there are generally far fewer LLPAs or pricing adjustments that can alter final rates and terms unlike for DSCR Loans.
It’s also important to note that there are seller’s agents and buyers’ agents on the vast majority of these transactions, and the seller’s agent can play an important role in the deal as well. For certain properties, especially actively leased properties with tenants or airbnbs, coordinating a sale involving potential buyers touring the property can be disruptive and costly, so selling agents (or “listing agents”) will typically only allow investors with vetted pre-approvals (i.e. “serious buyers”) to visit the property.
DSCR Loan pre-approvals are much easier to attain than for other types of mortgage loans, since they have limited information, don’t fall under strict consumer lending regulations and have plenty of caveats for changes down the line. Many agents don’t know this however, but it’s smart to get a friendly pre-approval letter with max potential qualifying rate and terms early on in the acquisition process and it should be easy to attain.
Also, note that it can be easy to get confused and mixed up with the broker terminology, i.e. “brokers” can refer to the mortgage broker (if you are working with a broker instead of a direct lender) but also to real estate agents, sometimes called real estate brokers. Same term – but one refers to the mortgage side of the deal, one refers to the real estate side.
For refinance transactions, there won’t be an agent involved, and the process will play out primarily between the borrower and the “lender,” with the lender sometimes a mortgage broker or sometimes the direct (actual) lender themselves. When working with a mortgage broker, besides just matching the borrower with a lender, the broker can also provide assistance with document collection, such as communicating the “needs lists” items, helping coordinate the payment and property visit for the appraiser and helping with document requests, communications and updates with the actual lender. This applies to acquisition transactions as well, however for acquisitions, many real estate agents will have transaction coordinators which are involved in assisting with things such as earnest money deposits, scheduling and paying for inspections and setting up title. Typically, agents (and sometimes lenders or mortgage brokers) will have a list of recommended vendors to work with throughout the loan cycle. These typically include home inspectors, property insurance providers and title companies.
Many real estate investors have also heard about “real estate wholesalers.” These are people that find undervalued properties, put the property under contract and then, instead of closing on the property themselves, sell or “assign” that contract to another buyer. They will assign (transfer) the contract at a higher price than what they themselves signed for, pocketing the difference as essentially a “finder’s fee” and never actually owning or flipping the property. While in some cases, these wholesalers are licensed real estate agents, who can use their market knowledge and access to find and promote these deals, they are not always licensed, as the laws and regulations over the wholesaler industry are a patchwork across states and pretty loose. Additionally, while wholesalers are sometimes involved in DSCR Loan transactions (i.e. assigning a contract on a turnkey property where the buyer uses a DSCR Loan to purchase), it’s pretty rare as wholesalers tend to overwhelmingly focus on fixer uppers or value-add opportunities, where finding undervalued deals is much easier. So in this case, Wholesalers are typically involved in transactions in which the buyer/borrower is using a hard money loan (or “fix and flip loan”) and doesn’t intersect much with the DSCR lending world, but it’s still a good concept for investors to know and understand.
Home inspectors come into the picture to do a property inspection for many real estate transactions with a detailed analysis of the property’s physical infrastructure and potential defects. These inspections do a very thorough check of pretty much every nook and cranny of the property and flag any issues from large (foundation cracks, water leaks) to small (loose toilet lid, missing light bulb). This is a separate process and purpose from the appraisal, who only notes the “general condition” and any very significant and noticeable defects, but they don’t look at these things nearly as closely.
The home inspector will produce what is called an Inspection Report which will typically be about 20 pages of findings and pictures and a full overview of the property and any issues, no matter how small. Home Inspections will cost typically in the $300-$600 range depending on size, market, number of units and location of the property. It’s important to note that the Inspection Report is not part of the DSCR lending document requests and will not affect DSCR loan qualification or terms as the lender will rely solely on the appraisal and any significant functional obsolescence in that report to affect lending decisions.
That being said, the Inspection Report can be important and usually creates an opportunity for potential renegotiation of the sales price and terms with the buyer able to put the seller on the hook for fixing any issues found or reducing price or allowing a credit at close for the buyer to do the repairs, especially in “buyers markets.” One important note is that many DSCR Lenders will have a limit on these seller concessions if any credits for inspection-fixes are included on the closing statements. Typically, DSCR Lenders limit these credits to be a maximum of 2-6% of the property price. And even though the “Less than $2,000 deferred maintenance” rule for property condition is typically only checked on the appraisal, some DSCR Lenders will flag items that look like deferred maintenance if they show up as a post-inspection credit, even if not noted on the appraisal. Smart investors and DSCR loan borrowers should get answers and confirmation of lender concession and credit policies upfront, so they know how to structure any post-inspection renegotiations that won’t mess with loan qualification and eligibility.
For acquisition transactions, finding a new property insurance policy (and in rare cases of flood zone properties, a flood insurance policy as well) is another important piece of the process and involves introducing another party to the transaction. Additionally, this isn’t skipped for refinances either, as depending on lender and deal-specific requirements, a new or updated property insurance policy will likely be required, updating the mortgagee clause, potential coverages and amounts (or getting a new policy if for some reason the property was uninsured prior!).
There are many property insurance providers out there (and the property insurance industry is similarly structured in that there are property insurance brokers – that shop among providers for you, or direct insurance companies). Real estate agents and DSCR Lenders will both likely have recommended insurance providers that they can help set you up with, but it can pay to shop around, since options are typically numerous and easily accessible if you want to make sure you are getting the best possible deal. Tiny little details related to insurance policies and entity information can be a common obstacle to a smooth and un-delayed DCSR deal, so getting all the details of what you need clearly written out and specified from your lender as early as possible in the process to be able to provide to the property insurance provider is definitely a borrower best practice.
The appraisal is arguably the key document in the DSCR Loan process, with many of the final terms, qualification and even sometimes eligibility hinging on its results, for both acquisitions and refinance transactions. Everyone involved in DSCR Loans is incentivized to close loans, as most of the “players” in the process only make money (or avoid losing money) when deals close and fund, including not only borrowers and lenders, but the agents and most other vendors to0. Consequently, there are strict independence and impartiality requirements for the appraisal process in DSCR Loans. So lenders, but really the loan buyers and eventual note holders, can trust the valuations (i.e. LTVs and risk assessment of the loans) for DSCR Loans, almost all appraisals for DSCR Loans must go through appraisal management companies or “AMCs,” companies that hire and ensure that an appraiser is an independent, unbiased third-party when completing the report.
DSCR Lenders can only “shop” for appraisers through this independent AMC intermediary, and borrowers can’t have a choice or undue influence on the appraiser, as this would cast doubt on the appraisal impartiality. So typically, an appraiser will be assigned to the deal through an AMC and the borrower will pay for it, typically upfront but sometimes at close or through a lender deposit – at a set upon standard price, with no opportunity to shop for “friendly” appraisers or any type of chance for “funny business,” such as attempting to influence the appraiser for a better value in exchange for a higher payment. Appraisals will cost generally in the range of $600-$1,200, dependent on several factors like property size, market and complexity.
It’s important to note that appraisers aren’t perfect, and it can be a common frustration for all parties involved in a DSCR Loan when values or market rents come in lower than expected. While a “rebuttal” can be possible, DSCR Lenders and AMCs will have established processes for disputing findings through providing reconsideration of value requests including providing supporting documentation and comps. This process is strictly regulated and enforced to prevent the aforementioned potential conflicts of interest.
For transactions in which an appraiser must re-visit a property, such as situations where the initial appraisal was conducted before renovations or building was fully completed, (i.e. provided a Subject-To value instead of “As-Is”) or if findings of deferred maintenance in the original appraisal were addressed, typically the same appraiser will revisit the property and produce what’s called a 1004D Appraisal Update and/or Completion Report. This will usually cost around $150-$250, so not a backbreaker, but important to be aware of and include in the budget if looking to finance a property that might not be 100% ready when the appraiser comes by the first time.
Q: Can I pick the appraiser for my DSCR Loan to affect the valuation?
A: No. For DSCR Loans, the appraisal must remain completely independent. Appraisers are selected through an Appraisal Management Company (AMC), and neither borrowers nor lenders are allowed to influence who is hired or how the value is determined—this preserves impartiality and credibility in loan underwriting.
The vast majority of real estate investors using DSCR Loans (i.e. borrowers) won’t interact with this service provider in the DSCR Loan process. However, Appraisal Reviews, or Collateral Desktop Analyses (“CDA”) are a mandatory part of the DSCR Loan process that can wreak havoc in the later stages of some seemingly smoothly progressing DSCR Loans. Essentially, an accurate appraisal is so important for lenders (and eventual loan buyers or “note holders”) since so much of the risk assessment on the lending side rests on value, or an accurate reading of LTV and opportunities to be made whole in event of a needed foreclosure, DSCR Loans will typically require a second valuation analysis of the appraisal to confirm its quality.
Essentially, CDAs or Appraisal Reviews check the appraiser’s work, assessing the quality of the report and primarily focusing on the value determination. It’s commonly referred to as a collateral desktop analysis since unlike a full appraisal, the analysis is done remotely with the reviewer performing the analysis and review from the comfort of their desktop computer (or more likely, laptop – but you get the point, they don’t actually visit the property or do as detailed of a review). The CDA is usually only around $100 to $250 and is typically charged to the borrower at closing, and only if the DSCR Loan successfully reaches the funding finish line.
The CDA does a thorough analysis of the appraisal but the key determination relevant for DSCR Loans is that it determines a CDA Value, typically expressed as a percentage difference from the Appraised Value. For example, if the appraised value comes in at $1,000,000 and the CDA value was determined to be $975,000 – this would represent a difference in value of 2.5%. Key for DSCR Loan borrowers to understand is that the vast majority of DSCR Lenders have a 10% threshold for CDA Value Determinations – so in practice, as long as the value is within 10% of the appraised value, the “box is checked” and the valuation determined by the appraiser is considered suitable for the transaction. In our example, as long as the CDA was greater than or equal to $900,000 (or 10% below the $1,000,000 appraised value), the loan could proceed towards close.
What happens with a DSCR Loan when a CDA comes in 10% or lower than the appraised value? In this case, there are usually several options and differing DSCR lender methodologies, but it’s not good news. DSCR Lenders will have different policies but will typically use the “lowest of all the different valuations” which could mean the original appraisal, purchase price (if applicable) and CDA value. But since a CDA coming in showing a greater than 10% variance is rare and typically a sign of a significantly flawed appraisal, the lender likely has policies requiring ordering an additional appraisal and/or a field review, and using the lower value of all things considered.
Additionally, if there is robust documentation that the appraisal itself was so flawed, the DSCR Lender may consider “tossing it out” and starting the valuation process all over again (following proper independence processes through the AMC), however this would depend on the investor willing to pay for another appraisal (although you can probably negotiate this fee to be waived in this situation) or more importantly, being okay with the additional weeks of delay, including getting the seller to play ball if it’s an acquisition with an expiring purchase contract. Bottom line is that these are rare occasions (CDAs invalidating the appraisal), but investors should be aware of the possibility and plan accordingly.
Also, it’s important to remember, both appraisals and appraisal reviews are out of the lender’s control – with the lender just as incentivized to get deals closed as the borrower (it’s how they make money!) so while these rare cases can be extremely frustrating, a low CDA value is a case where acknowledging it’s a problem for all the parties and to work together with the frustrated lender is the best practice.
Title Companies play a solid supporting role in DSCR Loans, and in practice, provide two key functions: 1) Providing Title Insurance to the Lender which provides assurances over ownership of the property and absence of any liens attached to the property or borrower that could override the lender’s collateral rights and 2) Providing a Trusted Intermediary, i.e. solving the “first-mover” problem in a transaction with significant sums of money at stake.
The Title Company generally provides the function of checking the title records of the property, including looking over sometimes long chains of title (ownership history) and any liens placed on the property that might cause problems for the lender. Confirming proper ownership – chain of title – is critical for pretty obvious reasons, if the lender provides a loan to an individual or entity that doesn’t actually own the property, they are completely out of luck for collecting payments or foreclosing, as the lender can’t foreclose on a property that isn’t owned by the borrower! So for acquisition transactions, this includes confirming the seller owns and can sell the property (and is not impersonating the true owner) and same thing for refinances, except in this case, confirming the owner of the DSCR Loan’s subject property, and borrower in the transaction, are the same.
In addition, the title company confirms there aren’t any liens which could jeopardize collections and lender’s rights, these could include mortgage liens (mortgage debt that is not disclosed and being paid off in conjunction with the DSCR Loan), tax liens (in which a governmental taxing authority always has first priority over a lender) or mechanic’s liens or judgments that could also complicate any potential needed foreclosure.
Q: What is a mechanic’s lien on a title report?
A: A mechanic’s lien is a legal claim filed by a contractor, subcontractor, or supplier who says they haven’t been paid for work or materials on a property. If it shows up on a title report, it clouds the title and must usually be resolved before a DSCR ender will close the loan, since it represents a potential debt tied to the property.
While this is the main task of the Title Company in DSCR Loan transactions, they are technically not providing this service as a fee, rather they are structured as an insurance provider, which means that they are essentially doing the work to confirm ownership and no liens, and then offering an “insurance policy” that promises to pay out any losses in case they missed anything and this resulted in material losses by the lender due to their miss.
In general, for DSCR Loans, the borrower will pay for the title insurance at close as a significant portion of the closing costs. The amount of title costs will vary significantly based on the property, the location and other deal detail factors, and will generally be a few thousand dollars (better expressed in dollars than percentages since the fees are typically not loan-size-dependent). While borrowers should have the right to “shop” title companies, many title companies are very similar in function and their fees are tightly regulated by local governments (even on business-purpose transactions like DSCR Loans), so there is not a huge amount of difference among title companies.
Typically, the DSCR Lender will have trusted title companies in most markets and it usually makes sense to go with that recommendation since the lender doesn’t make any money on title fees and is not incentivized or allowed title company kickbacks. Like appraisals and CDAs, it’s smart to remember that any title company fees, issues or findings are independent from lender control and the lender is incentivized fully to get the deals done, so pushing back or taking out frustrations on your lender for this part of the process will typically be counterproductive.
The second function that Title Companies play is that of Closing Agent or solving the intermediary “first mover” problem in large-scale transactions. Basically, a DSCR Loan is a legal document where the borrower promises (legally binds themselves) to pay back the loan plus interest through signing a promissory note. In exchange, the lender wires the loan amount to the borrower. The problem is who “goes first.” If the borrower signs the promissory note and hands it over to the lender before getting the money – they are legally liable for the debt, even if the lender never sends the money! In reverse, if the lender wires the money to the borrower before receiving fully signed legal documents, and the borrower runs off with the cash, there’s nothing the lender can do!
This is solved through the Title Company also performing the closing “agent” role – basically serving as a middleman between borrower and seller so that neither party needs to “go first.” The Title Company will collect the signed legal documents and ensure they are properly notarized and collect the wired money from the lender. Once both sides have satisfied their side of the deal, the Title Company will send the signed loan documents (including the promissory note) to the lender and release the funds to the borrower. Voila – done deal and everybody walks away happy. The Title Company (as part of their Title Policy) will also ensure that the transaction is properly filed, deeded and recorded in the required jurisdiction’s registry and issue what is called a “Closing Protection Letter” that insures the closing process and protects the lender against fraud on behalf of the title company.
Q: What is a judgment lien on a title report?
A: A judgment lien is a legal claim placed on a property after a court issues a judgment against the owner for unpaid debts, such as credit cards, loans, or lawsuits. If it appears on a title report, it must usually be paid off or cleared before a DSCR lender will close the loan, since it prevents the property from having clear title.
DSCR Loan documents must be properly notarized by a licensed notary, who serves to verify that the signer of the documents has the correct identity. Typically, to close the loan, the borrower will physically go to the offices of a Title Company and sign the documents in the presence of a notary. Generally, this will require setting an appointment at the title company at a designated time slot and this part of the process typically takes around an hour. Best-prepared borrowers schedule this in advance as title company slots can “fill up quickly” – especially towards the end of the month when closings are usually most common. Plan Ahead – as mishaps on the final signing can delay or even derail DSCR deals at the finish line!
DSCR Lenders are also usually flexible for signings as they typically won’t require loan documents to be physically signed at a title company office. Rather, appointments with a mobile notary are generally possible, where a licensed notary will come to the borrower and sign in any public place or setting. This additional flexibility is appreciated by a set of investors, particularly those with prolific portfolios (and who “know the drill” at signings, so don’t need extensive walkthroughs common for first-timers) or those that are always on the go. This might entail a little extra scheduling and maybe additional small fee (likely in the 2-digits, but sometimes up to a couple hundred for remote areas or during busy times), but as always, best practice would be to inquire about the possibility and logistics of a mobile notary for closing as soon as possible in the process so the lender and title company can coordinate and accommodate.
Q: Can you use a mobile notary for a DSCR Loan?
A: Yes. Most DSCR Lenders allow closings to be handled by a mobile notary, also called a traveling notary or notary signing agent. This makes the process more convenient by letting the borrower sign loan documents at their home, office, or another agreed location. The mobile notary verifies identity, witnesses signatures, and notarizes required forms, just like an in-office closing.
DSCR Loans are in their purest sense a legal contract, the loan documents represent a legal agreement between borrower and lender, so it’s no surprise that lawyers and law firms are involved in the process and loan cycle. The generation of loan documents for DSCR Loans are not custom written by scratch, they will typically be generated by specific legal firms that generate semi-tailored loan doc sets for each transaction; by utilizing templates, software and inputs related to the loan specifics and property state and jurisdiction. Unlike larger commercial real estate loan documents or complicated business lending agreements, these loan documents are very standardized and almost never have room for negotiation or customization outside of standard lender options (such as the menu of prepayment penalty options offered).
While borrowers on DSCR Loans are always free to hire their own counsel to review loan documents and make recommendations, it is typically not done since there is little room for negotiation or changes from the lender template docs and the cost would be expensive for lack of influence. Loan Document generation is typically a fee passed through to the borrower and shouldn’t be more than a few hundred dollars (with the exception of DSCR Portfolio Loans which can run a bit more). While there’s very little room to negotiate or customize loan terms, savvy borrowers should be on the lookout for fee gouging on loan document generation, anything more than $250-$400 range might be an unreasonable markup that can be pushed back on.
Q: What is the typical loan document fee for a DSCR Loan?
A: Most DSCR Lenders charge a standard loan document or doc prep fee of about $100 to $250. This covers the preparation and compliance review of the closing package, and it appears as a routine line item on the Settlement Statement for nearly all DSCR loans.
For investors utilizing DSCR Loans (or any type of loan for that matter) in the Lone Star State, there will unfortunately likely be an additional attorney fee for an individual lawyer review of the loan documents, due to a state law that mandates that only a state-licensed attorney may prepare or review loan documents, and since most DSCR Lenders utilize national software-based loan generation software and don’t employ an in-house Texas attorney for Texas loans, they will usually hire an outside attorney to review the loan documents for an additional fee, typically another $100-$150 fee charged to the borrower. This review typically is another “check the box” line item that unfortunately can’t be avoided and is just a small price to pay for investing in Texas. More importantly, it can add an additional day from “clear to close” to the closing of the loan under typical processes, so it makes sense to ensure that this is on everyone’s radar for Texas transactions when scheduling and coordinating closes, especially when attempting to close under tight timelines.
Q: Why is there an attorney doc review fee on my DSCR Loan in Texas?
A: In Texas, state law requires that a licensed attorney review mortgage loan documents before closing. Because of this, DSCR Lenders must hire a Texas attorney to complete the review, and the cost (typically $100–$150) appears on the Closing Statement as an attorney doc review fee. It’s a standard, non-negotiable compliance requirement in Texas closings.
Once a DSCR Loan is closed, most of the players involved in the loan origination process exit the stage and won’t be involved at all anymore. While you can still likely contact your lender representative post-close with any issues or problems, there are limits to lender assistance since the vast majority of DSCR Loans are sold within a couple months of the closing and owned by a “note holder” separate from your original lender. These note holders will also almost always hire a third-party servicer to handle the loan servicing, collecting payments, managing the property tax and property insurance escrows, providing customer service and tax and account statements that are different from both the original lender and the note holder. This is because the loan servicing business is very low-margin and specialized, so it typically only makes sense from a business perspective for servicing companies to achieve massive economies of scale by providing servicing as a sole and specialized service.
Unfortunately, the servicing industry for DSCR Loans is riddled with problems and issues and is typically a pain point for many borrowers – a source of frustration for both borrowers and lenders as there can be serious consequences from servicing errors or issues. A major source of the issues is related to the initial servicing transfer in which the party that collects payments on your DSCR Loan immediately changes within the first payment or two. This “transfer” should be relatively seamless if there are ACH Payments set up with the loan documents since the standard “Automatic Payment Authorization Form” included in DSCR loan documents will authorize the lender to automatically draw the monthly payments and authorize “its successors and/or assigns,” which is legal language that authorizes the loan buyer and their servicer to seamlessly continue drawing the authorized payments. Unfortunately, there are frequent errors made by servicing companies in these transfers, and when onboarding the bought and assigned DSCR Loans to their servicing systems, the ACH payment schedule can frequently be “lost” in the shuffle and not integrated into the new system.
A big problem that currently exists for DSCR Loans servicing is that these servicing handoffs, including ones with automated ACH payments that should require no actions or worries from borrowers with fully stocked checking accounts to draw from, are fraught with issues. Sometimes, the new servicer will require the borrower to re-sign up for a new servicing portal, re-enter payment information and many times, even start manually making the payments, even if they specifically signed ACH Forms to avoid having to do so.
In a current climate that is rife with scammers and fraudsters that are constantly sending text messages, phone calls and e-mails phishing for financial information – many investors (DSCR Loan borrowers) are presented with a situation where an unfamiliar “lender” – different from the one they just worked through a whole loan process with a few months prior and that not only assured them, but in many cases mandated they sign legal documents to have payments automatically withdrawn – is demanding payments and personal information. Many investors can 100% be excused for being skeptical and cautious about responding, clicking or sending money or information in these situations because of the high risk of financial fraud and calamity. Then, when the payments are missed and the loan incurs late fees or even default, the extreme frustration becomes very evident – and justified.
Unfortunately, while these servicing issues can be remedied, it is still the responsibility of the investor (borrower) to confirm everything is accurate and payments are made on time, even if it’s an unwarranted and undeserved extra headache and hassle. The good news is that the well-prepared borrower can easily confirm if payments have been made from the designated account in the correct amount and should always do so. If there are any issues, you can certainly contact your original lender and they can 100% confirm if a new lender / servicer is the rightful owner of the loan and the non-fraudulent place to send payments. And ultimately, the best news is that these loan sales and servicing transfers will almost always happen relatively immediately, within the first few payments, so while there might be an initial hassle and issues to work out, once this first transfer has passed, it should be smooth sailing with a professional portal for automated payments and reporting from there. Most DSCR Loans land with professional servicing companies which once up and running, can competently handle the payment processing, account statements and balances (important for taxes and eventual payoffs) and escrows and have online portals with good usability.
There can be servicer errors with regard to reporting an individual's credit scores. One of the big benefits of DSCR Loans that real estate investors love is the ability to borrow through an entity (i.e. LLC) so that if payments are made on time and without issues, the debt doesn’t show up on personal credit reports which can keep scores higher (too much debt can lower FICO scores). Sometimes, DSCR Loan servicers will mistakenly report LLC-debt to individual credit reports through servicer error (unfortunately, “servicer errors” are rampant in the industry). In these cases, you can typically contact your original lender or servicer and they will remedy this error relatively promptly.
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