Kiavi executive says underwriting variation is one of the biggest things brokers should know
As more brokers are adding investor clients to their portfolio, debt service coverage ratio (DSCR) loans are seeing a surge.
There is an adjustment for brokers moving into investor loans from traditional consumer mortgage loans. Some of that adjustment shows up at the beginning of the loan, and other differences show up when the loan is underwritten.
The underwriting process, and what brokers should expect from it, can be very different than what they’re used to if agency conventional loans make up most of their previous deals.
Charles Goodwin (pictured top), VP and head of bridge and DSCR lending at Kiavi, said his first piece of advice to brokers who are considering moving into investor loans or who have just started originating them involves understanding how underwriting is different.
"First and foremost, understand the type of underwrite that it is," Goodwin told Mortgage Professional America. "What it is, is it's more of a business purpose underwrite about the income of the property rather than the income of the individual."
Understanding loan variations
Goodwin said that basic structure holds across the industry, but that consistency can create a false sense of security. Once a broker moves past the underlying concept, the actual mechanics of how a given lender applies it can shift meaningfully from one shop to the next.
"Although the underwrite is generally similar from lender to lender, you do have variations of how you would apply a DSCR ratio, or what type of valuation process there's going to be, or what type of documents might be collected within that process," he said. "It's about being diligent around asking the lenders the right questions around what documents are needed, what does the underwrite entail, what does the process entail."
He said even a detail as specific as how a lender calculates the DSCR can differ enough to change what a property qualifies for, and a broker who assumes every lender runs the same formula can end up steering a client toward the wrong deal.
"Some lenders might say, ‘I'm only using what the market rent on the appraisal says, and that's what I'm using for my underwrite,’" he said. "Some lenders might say, ‘I'm using that, but I'll true it up by 10% if there's a verified lease in place with a tenant that's up to 10% higher than that.’ You might lend at this leverage to a 740 credit score, but somebody might be five points lower in leverage to that same credit score."
How and where to execute deals
The rate lock process, he said, is another area where assumptions from conventional lending do not always carry over. It is easy for a broker who is used to agency products to assume a rate lock works the same way everywhere, and that assumption can end up costing a client money they did not expect to spend.
"Some brokers might not realize that there is a kind of traditional rate lock process associated with these DSCR loans, and ask about what that lender's rate lock process is," he said. "All of our rate locks are for 30 days, and there's no charge for it. Some might charge for a rate lock. Some might say this is our baseline, but you can pay more or less depending on the length of it. Some might charge for an extension. Some might not."
Goodwin said there's one more thing worth confirming before trusting a new lender with a client's file, and it has nothing to do with the underwriting guidelines themselves. That question is less about what a lender says it will do and more about whether it has been tested.
"Understand the ability of that lender to execute for the customer," he said. "There's a lot of capital coming into this space, which does mean that there are new lenders that are emerging that might not have proven track records or might not have fantastic processes built out or good technology built out. It's a lot of different things there. Understand that you just have to ask your questions and do your diligence."
As for where the best DSCR deals are being found in the current market conditions, the Midwest continues to be strong according to Goodwin. However, there are other markets where deals can be found.
"It's mainly that cash flow persists in these markets, where the Midwest is historically known as kind of the slow and steady home price appreciation, as opposed to where I live in San Diego, where some home prices have run up by 40, 50% since the start of COVID," he said. "The benefit of that slow and steady is that you can still earn a decent cash flow in some of these Midwest markets.
“It's not all the Midwest. There are still markets in California that cash flow, and there's a lot of Sunbelt markets that are pretty strong, but the Midwest has definitely been a hotspot for these DSCR loans. Places like Cleveland, Indianapolis, Chicago, Philadelphia, St. Louis – those kinds of Midwest core markets – the DSCR space has served them quite well."
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This article is part of our Monthly Spotlight series, which in September focuses on investor-focused loan products. Full coverage can be found here.
