Mortgage interest rates are at the highest levels I have seen since 2007. They have more than doubled since December of 2021 and the effects of this rapid rise in rates are finally being felt in the real estate markets.
- Housing inventory is sitting on the markets for a longer period than we have been used to seeing in over the past five years.
- Higher rates mean less buyers in the market, which is reducing the amount of offers for each home listed on the MLS.
Shift to a Buyer’s Market
In the last nine months the market has shifted from a seller’s market to a buyer’s market with sellers finally willing to negotiate downward on price. When rates are up and home prices are down, the overall housing payments may still be affordable to many buyers.
Refinance Options Make It Work
Eventually mortgage interest rates will fall again and there will be another refinance boom. Getting in now despite the higher rate environment, while home prices are softening and dropping, makes sense since mortgage rates will likely fall in 2023 when refinancing will become attractive.
Buying Options for Investors
The drop in home prices has spurred more investor activity. There are some newer mortgage products in the markets that have been introduced over the last few years, and are designed to help investors purchase residential real estate without traditional qualification requirements. These products are similar to commercial mortgage products where the income for the property determines whether or not the lender will fund the loan.
Debt Service Coverage Ratio (DSCR) Loans
We refer to these products as DSCR loans, which stands for Debt Service Coverage Ratio. The gross income on the subject rental property needs to cover the subject property’s monthly liabilities for the lender to fund the loan. The monthly liabilities on the subject property includes the new mortgage Principal & Interest as well as the monthly Property Taxes and Home Owner’s Insurance.
Usually, to get to the desired DSCR, the down payment will need to come in at a minimum of 20% down. Most lenders will have an absolute minimum of 15% down payment regardless of the DSCR calculation. The larger the down payment, the lower the interest rate. Mortgage rates on these products are potentially equal to conventional mortgage rates for investment property purchases.
No Personal Income Qualification for DSCR
The key to these DSCR loans is that the borrower doesn’t have to qualify using their personal income. Traditional mortgage products require a DTI, Debt-To-Incom