Investor and DSCR loans are taking a bigger share of Non-QM production. Friday Harbor is betting that more loan officers will need the underwriting knowledge to handle them.
The Seattle-based mortgage technology company has expanded its pre-underwriting platform to investor loans, including debt-service coverage ratio (DSCR) mortgages. The new capability reviews leases, appraisal-based rent schedules, property information, and borrower and entity documentation against applicable program guidelines before a file reaches formal underwriting.
Investor and DSCR loans accounted for 35.1% of Non-QM production in August, according to Optimal Blue data. That share increased 1.67 percentage points from July, 5.73 points over three months, and 6.66 points from a year earlier.
Non-QM itself reached 11.3% of mortgage rate-lock volume in August, the highest share shown in Optimal Blue's three-year data.
That growth creates an opportunity but also a practical problem: DSCR lending comes with rules that can vary considerably among lenders and investors.
Unlike a traditional mortgage that primarily qualifies a borrower using personal income, a DSCR loan generally looks to the investment property's rental income relative to its debt obligations. Requirements around rent calculations, property types, reserves, loan-to-value ratios, and borrowing entities can differ from one program to another.
That can make a seemingly workable investor deal more complicated once it reaches underwriting.
Moving DSCR Questions Closer To The LO
Friday Harbor is attempting to move some of those questions closer to the point of sale.
The platform reviews information from the loan file against the applicable program guidelines and flags potential issues before formal underwriting. For an investor loan, that can include analyzing lease information, appraisal-based market rents, property details, and documentation associated with the borrower or borrowing entity.
The idea is to give an originator an earlier indication of whether a deal is structured correctly — and what may need attention — rather than requiring every complicated scenario to be escalated to an underwriter or another specialist.
“DSCR loans can be a great opportunity for lenders, but they are difficult to scale when only a small number of people in the organization know how to structure them,” Friday Harbor founder and CEO Theo Ellis said. “By putting that expertise in originators’ hands earlier, Friday Harbor gives more of them the confidence to evaluate these deals, work through questions and compete for a growing share of the market.”
Another Step Into Non-QM
The investor-loan expansion builds on Friday Harbor's broader move into more complicated mortgage products.
Friday Harbor had expanded its platform to bank-statement and certain jumbo loans in August. The platform can calculate qualifying income for bank-statement borrowers and evaluate files against investor-specific guidelines before underwriting.
Earlier this month, Friday Harbor also integrated Freddie Mac's Income Calculator, allowing originators to obtain an agency-supported qualifying-income calculation for wage earners with variable pay earlier in the process.
The DSCR addition applies the same strategy to a part of Non-QM that has been gaining market share.
As NMP previously reported in its examination of the DSCR market, investor lending has attracted more attention from wholesalers and capital markets as lenders look for production outside the highly competitive agency market.
That competition is also putting more emphasis on execution.
With less separation among some DSCR rate sheets, originators increasingly have to compare more than price. Credit terms, reserve requirements, rent calculations, and the ability to get a complicated file to closing can determine where a loan ultimately lands.
For LOs who only occasionally encounter investor borrowers, having more of that program knowledge available before underwriting could lower one of the barriers to pursuing the business.
