DSCR spreads over conventional do not compress the way people expect when rates rise
A broker I know made a comment that stayed with me: in a 7 percent conventional market, his DSCR quotes were coming in at 8.25 to 8.75, and investors were treating that 125 to 175 basis point spread as the fixed cost of using rental income instead of W-2s. What he noticed, and what most borrowers miss, is that the spread itself tends to widen when base rates are high, not hold steady and not compress. The assumption doing the most work in that misread is that DSCR pricing tracks the same index as conventional and simply adds a constant premium. It does track similar benchmarks, but the risk premium lenders attach to DSCR products moves with credit appetite and secondary market demand for those loans, and both of those tighten when rates are elevated and transaction volume falls. Fewer investors are buying, originators are holding more paper or competing harder for the buyers who remain, and that uncertainty gets priced into the spread. So a borrower who expects that rising rates will affect DSCR and conventional equally is looking at the wrong variable. The gap between them is the number to watch. On a 300,000 dollar loan, 50 extra basis points is 1,500 dollars a year in debt service, which on a property with thin coverage is the difference between a deal that pencils and one that does not. The competitiveness argument for DSCR relative to conventional is really a secondary market liquidity argument, and when that market tightens, the product gets more expensive faster than the benchmark rate alone explains. What coverage ratio is the property you are pricing this on actually running at, and has anyone pulled a quote in the last two weeks rather than relying on a rate sheet from last month?
