Why Real Estate Investors are turning to DSCR Second Mortgages in Today’s Market
The housing market has gone through a notable shift, and savvy real estate investors are adapting quickly. With investor transactions now comprising nearly 30% of total purchase volume, the demand for DSCR loans – including DSCR seconds (also known as a DSCR HELOAN)- is surging. Here’s why these products are becoming essential tools for today’s real estate investors – and why originators need to be prepared to offer them.
Understanding DSCR Loans
DSCR loans are designed for real estate investors who qualify based on the income generated by the property rather than personal income. The debt service coverage ratio compares the property’s monthly rental income to its monthly debt obligations (principal, interest, taxes, insurance, association dues).
DSCR loans are attractive to investors because of the flexibility that includes:
- No tax returns or W-2s are required
- Qualification is based on property cash flow
- Ideal for self-employed borrowers and LLC-owned properties
- No DTI constraints
All in all, it’s an ideal loan that allows portfolio growth without traditional qualification restraints.
The Rise of Second Mortgages (DSCR HELOANs)
While first-position DSCR loans have been around for years, DSCR second mortgages are gaining popularity as a tool for:
- Tapping into equity
- Funding renovations
- Bridging the gap for new investment property acquisitions
These second liens are structured similarly to their first-lien counterparts in that qualification hinges on the property’s income, not borrower income. Investors can pull equity from an existing rental property with strong cash flow and re-deploy it into another investment property or a renovation project – all without refinancing the first mortgage or disrupting low-rate legacy debt.
Why Now and Why Should Originators Offer Investor Loans?
Mortgage originators should offer DSCR and DSCR second mortgages to their investor borrowers because these products directly align with how investors operate – focusing on property cash flow rather than personal income. DSCR loans enable originators to serve a broader range of clients with diverse needs from funding renovations to acquiring more properties.
Numerous factors are converging in today’s market:
- Increased Investor Activity
Investors make up 30% of current home purchases according to CoreLogic seeking both long-term rental yield and short-term appreciation. Many of these deals require tailored financing due to tighter lending standards or other investor preferences. Some investors prefer a DSCR loan over submitting documentation that could result in a prolonged closing.
- Home Prices Remain High
As affordability tightens for owner-occupants, investor competition for properties is intensifying. This might require additional funds for bidding, repairs or upgrades that could come from a DSCR second lien loan.
- Cash-Out Refinances are Less Attractive
With many investors locked into low-rate first mortgages, cash-out refis are off the table. A DSCR second mortgage allows access to equity without touching the first lien.
- Renovation Demand
Investors are increasingly buying value-add properties that need updates to meet rental market expectations. A DSCR second mortgage provides targeted funding for those improvements that could turn underperforming assets into cash-flowing rentals.
What Are Some Use Cases for DSCR Second Lien Mortgages?
- Purchase Assistance: Bridge the downpayment gap or boost the strength of an offer on a new investment property.
- Renovation Capital: Finance upgrades that improve rentability and increase monthly income.
- Portfolio Growth: Leverage one property’s equity to help acquire another which can compound long-term returns.
Are You Now Convinced to Add and Market DSCR First and Second Mortgages?
Adding DSCR and DSCR seconds to your loan offerings gives you powerful and flexible mortgage tools tailored to today’s market dynamics. Your real estate investors will be able to grow and scale, even in a high-rate environment, thanks to your help! Get the word out to your real estate investors that you have the full suite of financing tools to help them reach their goals. Deephaven provides the resources and support you need to market these products with confidence.
Access to capital is always the edge for real estate investors. DSCR loans including DSCR seconds is how investors get it. Don’t miss out being the go-to originator they turn to for success time and time again.
Explore our DSCR Second Mortgage product here.
