Rocket latest lender to add debt service coverage mortgages

Rocket Mortgage has come out with a debt service coverage ratio product in both its wholesale and retail channels, joining a rather competitive landscape of both non-qualified mortgage specialists and more traditional lenders like its rival United Wholesale Mortgage, that already serve investors looking to finance rental properties.

Another recent entrant with a suite of non-qualified loan products including DSCR is PHH Mortgage, whose parent company Onity approximately one month later announced the disposition of its reverse mortgage operations to Finance of America.

Courtesy of Rocket Cos.

"If you go back through the year, every quarter we added at least one new product," said Dan Sogorka, the general manager of Rocket Pro in an interview. "This was a really exciting one, because it's been a strong market for investors in terms of home buying."

Why Rocket added a DSCR product

When asked about why Rocket is jumping in at this point to a market niche others are already occupying, Sogorka replied that the company's partners asked for the offering because they want to do more with the Detroit-based lender.

"When you think about what really makes us stand apart, it's our best-in-class technology, operations, pricing, support, our AI suite, our Navigate product," he continued. "Our partners now want to continue to use all of these regardless of what product they're doing."

Others have technology offerings specific to the DSCR market. Earlier this month, Angel Oak Mortgage Solutions launched a rental automated valuation model. The product incorporates Clear Capital's Rental AVM.

It's very time consuming when an appraiser has to be hired to do a rent valuation and it does not come in as expected, said Tom Hutchens, president of Angel Oak Mortgage Solutions, in a recent interview. When that happens, the closing is likely to be delayed.

This technology helps to come up with a more accurate valuation of the rent rolls which is used to underwrite a DSCR loan, helping to speed the process.

Why lenders should add investor products to their menu

Angel Oak is primarily a third party originator, and Hutchens was asked why mortgage lenders would want to offer investor loans.

"So many people in the last 10 years that have just become investors in real estate, given the lack of supply of housing, the demand for rental housing is just continuing to grow," Hutchens said. "I think that's why people, from an origination standpoint, believe, 'hey, I've got to participate in this space.'"

Single-family rental is becoming a bigger part of the market and "they're just an excellent opportunity to lend upon," added Ben Fertig of Constructive Capital, another non-QM wholesaler, also in a recent interview.

"If you're an IMB and you want to retain and recruit loan officers, you better have products that you know are at least hitting the market," Fertig continued. "Both the DSCR rental loans and residential transitional loans do."

UWM entered DSCR lending in March 2022 and expanded on its offering at a couple of points during 2023.

For now, Rocket has no plans to enter the RTL market, Sogorka said.

Investor mortgages growing market share

Optimal Blue, a product and pricing engine, finds non-QM lending is continuing to expand, both in terms of loan production and in the number of entities offering these loans, said Brennan O'Connell, director of data solutions.

"In October, the non-QM share of total rate lock volume hovered near its recent peak at 8%," O'Connell said. "DSCR loans, which represent nearly 30% of total non-QM lock activity tracked by Optimal Blue, were up more than 50% in October versus the same time last year."

The category was up by 95 basis points from September, Optimal Blue's Market Advantage report said.

Meanwhile bank statement loan share was just shy of 35%, while all other non-QM was 36%. Bank statement locks were 168 basis points higher than September but 216 basis points less than one year prior.

At 16.6% of all locks in October, nonconforming (including jumbo as well as non-QM) was relatively flat from the prior month but up by 154 basis points from the same time in 2024. 

Rocket's DSCR mortgage parameters

Rocket is already processing applications for the DSCR loans.

Its loan limits are up to $3 million for purchases and rate-and-term refinancings, along with $2.5 million for cash-out refis.

If the amount is over $2 million, two appraisals will be required, with the lower valuation used to qualify the property.

Most importantly, "the product's not eligible for first-time real estate investors," Sogorka warned.  Borrowers will need to have a minimum of one-year property management experience within the past 36 months and/or one year of receiving rental property income.

"This is an experienced investor product," Sogorka said. "You can close it in an LLC, which was another big ask from the community." UWM's DSCR offering also allows the borrower to be an LLC, according to its November 2023 announcement.

Rocket has several investors for this product but it declined to name them.