What do you think about these DSCR rates and fees?

Question

Hi, I'm looking to refinance my Canton, OH (44714) BRRR property. Assumptions I provided to a mortgage broker is below. Below that was her response to a 30 yr fixed rate DSCR rates, plus origination and underwriting fees.

I would appreciate this community's thoughts on these rates, origination and underwriting fees. Thank you!

Assumptions:

Credit 720

Single Family Investment Property

Property Value: $120k

Amount financed: $90k or 75% LTV

NO Pre-Payment Penalty (not allowed in Ohio)

DSCR Ratio 1.25+

30 YR Fixed Rate DSCR:

8.250% with $2475 in discount points. P&I payment: $660
8.125% with $2148 in points. P&I payment: $668
8.25% with $1800 in points. P&I payment: $676
8.375% with $1462 in points. P&I payment: $684
8.875% with $0 points. P&I payment: $716

Origination Fee: $4500

Underwriting fee: $1395

Nick Belsky · Answer

@Su PakThese are very high rates and costs, even with no prepayment. I am doing a loan in Pennsylvania right now (also no PPP allowed for a loan this size) and we are doing an 80LTV purchase at 6.76%. A 75LTV Cash Out on that deal would be about the same and there is no lender origination fee, only the $1600 UW fee.Ohio has recently updates some of it's laws in terms of PPP. The lender's licensing and their attorney's interpretation of the Ohio statutes is what will determine if the lender will provide PPP options or not. The lawyers will normally decide to offer only no PPP options as not to possibly conflict with the law, so the lender is mitigating possible risks in not being compliant. In the end, some lenders will require a PPP and some will not allow one in Ohio. Unfortunately, those that do not allow a ppp will often raise the rate or charge origination to offset their risk of having no PPP on the loan product.If anyone is interested in the Ohio statutes, you can read the summary with links to specific statutes here:https://com.ohio.gov/divisions-and-programs/financial-instit...Interestingly enough, the PPP statues only apply to 1 or 2 unit residential homes with a few other "ands" in order to meet the criteria. The loan limit was raised to $110,000 in January 2024.Cheers!

Devin Peterson · Answer

Not going to comment on high or low because a lot of people underestimate the time and work that goes into a loan, underwriting, and tracking docs. etc. Lenders and brokers are paid by the loan amount. To a certain extent, it's not worth it to work on files with tough conditions without a bottom-line base origination fee. So that's probably why you're experiencing "higher" fees. The same goes for lenders and the rate. Loan servicing companies put in the same time and manpower to service a loan that is 90K compared to one that is 900K - there's no difference. That is why rates are higher on smaller loan amounts. I think a greater appreciation for the work lenders and brokers go through needs to be understood more. It's the same case for hiring a highly referred plumber who will fix the leak and a few other things for the right price, or take the new guy no one has ever heard from and your leak has now turned into an explosion.

Erik Estrada · Answer

This is where making sure doing your due diligence on the broker/lender's reputation truly matters. There are several lenders that allow PPP in Ohio. But although they are available, you are better off reducing the PPP in a declining rate environment. Chances are you will refinance again and being on a long PPP will be costly.Chances are this quote has some broker rebate, so find out how much is he truly charging you? Ask for the day rate sheet. I don't think he is quoting you at par.

Brittany Minocchi · Answer

Hey Su -It's not true that prepayment penalties aren't allowed in Ohio in ALL instances - this varies based on lender and/or loan amount. I'm in Ohio (live local to and grew up in Canton actually!) and DSCR loans are the majority of my business. A few notes:- I advise people NOT to buy out the PPP completely, but to maybe shoot for 2-3 years just to get a more reasonable rate unless you are absolutely positive you want to refinance sooner and are willing to pay more for that option.- A hurdle here is that your loan amount drops below $100k, which is the minimum for many lenders. Because of that, you're likely to see higher rates and fees.-With 25% down, a 720 FICO and DSCR of 1.25, these rates are very high.I would highly recommend exploring other options. Feel free to reach out if you need anything else, happy to connect!

Derek Brickley · Answer

I'd agree with Devin, it's hard to say. I would think they are high in my experience. Different lenders allow different exceptions on that pre-payment penalty rule, so it may be worth looking at that. On a smaller loan amount, fees will typically be higher but it just depends!

Patrick Roberts · Answer

The combo of points and high fees are partially due to the lack of a prepayment penalty. I have no idea whether these are or are not allowed in OH as I don't lend there, but a loan with a 2 or 3 year prepayment penalty would likely have lower points and fees because you are basically paying that penalty up front as a fee in this loan. Regardless, though, expect higher points and fees overall because of the smaller loan size.

Brandon Beardt · Answer

Hi Su,Yes, with the DSCR programs readily available today, I would say all of these are high. The origination fee of 5% is high. The interest rate for a DSCR loan above 8% is high. The minimum DSCR ratio of 1.25x is HIGH. I'm not sure why your mortgage broker mentioned there not being a prepayment penalty allowed in Ohio when I've closed a multitude of DSCR loans in OH that have prepayment penalties. It's very possible your broker is limited in the products they have available for you. Given all of these assumptions, you should be able to get a DSCR loan in the 6's/low 7's (rate), with a 3-5 year prepayment penalty, and minimum DSCR ratio of 1.00x, especially in OH. I would strongly encourage you to shop around for other options for this particular scenario.

Scott Wolf · Answer

Those seem a bit high. PPP is allowed in Ohio. But if all the info is correct, our rate would be 6.74% with a 1 year PPP.2,500 origination and 1,505 underwriting fee.

Su Pak · Answer

Thank you to the amazing BP community for their insight. Really appreciate it and will pivot based on the advice I've received. Special shout out these these guys for taking the time to respond: @Austin Steed @Patrick Roberts @Nick Belsky @Craig Warner @Derek Brickley @Robin Simon @Devin Peterson @Brandon Beardt @Andrew Zamboroski

Andrew Zamboroski · Answer

Based on what you presented, it does seem high. Even for no prepayment penalty and a lower loan amount. We’re close to 1% less and at less costs too! Let me know if you want a second look.