Investors are asking more questions than they used to about debt-service-coverage ratio (DSCR) loans, a surging segment of the mortgage market that operates outside government-backed parameters.
“We’re having to do more explaining about how we think about the underwrite, how we arrived at the value, or just changes to our policies,” Charles Goodwin, vice president and head of bridge and DSCR lending at Kiavi, said in an interview with HousingWire. “It’s more collaborative in that way, but those questions have not translated into less demand or much of a higher premium at all.”
The heightened scrutiny comes roughly a year after a fraud scheme came to light in Baltimore, where a group reportedly purchased hundreds of homes — predominantly in majority-Black neighborhoods — at heavily inflated prices. The deals were financed by hundreds of millions of dollars in DSCR loans from dozens of private lenders and more than half of them ultimately defaulted.
While the Baltimore case left a bruise, it hasn’t derailed the national growth trajectory of the DSCR market. Tailor-made for real estate investors, these loans bypass the need for W-2 forms, pay stubs or personal income verification. Instead, borrowers qualify based strictly on the property’s projected rental cash flow, pushing them outside the boundaries of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
Isolating data for DSCR loans can be tricky, and data sources often combine with broader investor loans. Together, DSCR and investor loan lock volume jumped roughly 40% from January 2022 to mid-2025, when the Baltimore case was unveiled. Lock volume growth reached 130% by August 2026, according to Optimal Blue estimates.
As a share of non-QM production, investor and DSCR loans stood at 22% in August 2022 before rising to 28% in August 2025 and 35% in August 2026, according to Optimal Blue.
Reasons for market growth
Bank of America analysts estimate that non-QM originations will hit $175 billion in 2026.
“Driving this growth has been the increased volume of DSCR/investor loans within Non-QM, with the share reaching 50% of all collateral,” the analysts noted in a June report, adding that non-QM investor and DSCR originations actually eclipsed agency and private-label investor issuance in 2025.
Lending executives point to multiple factors fueling this expansion — including stretched homebuyer affordability that are pushing more Americans into rental homes, paired with aggressive product diversification by mega lenders like Rocket Mortgage and United Wholesale Mortgage as they navigate a high-rate environment.
That intense competition is keeping pricing relatively tight, with DSCR rates currently hovering between 7.125% and 7.25%, according to Ben Fertig, president at Constructive Loans.
“DSCR complements one of the largest trends in housing broadly, which is rentals becoming a bigger percentage of housing overall,” Fertig said. He noted that originators who traditionally relied on conventional, owner-occupied mortgages have aggressively pivoted to DSCR to generate origination volume and survive suppressed market conditions.
Other executives said that securing a DSCR loan is often a much smoother process for borrowers than the rigid investment property lending requirements of regional or local banks.
“The majority of users of this program are small, local real estate investors. It’s not big Wall Street, institutional, corporate investors,” said Jacob Washburn, branch manager and senior mortgage adviser at Cornerstone Home Lending.
“Oftentimes, it can be challenging for that profile to fit the box of traditional lending. In the DSCR loan, what we’re looking at is: Does the property itself generate enough income to support the debt service?”
Vulnerability to fraud?
The features that make DSCR loans so attractive to investors also make them vulnerable to bad actors. Borrowers can easily shield their identities behind limited liability companies (LLCs), skip the rigorous income and employment verifications of traditional underwriting, and purchase multiple properties simultaneously.
Data from Cotality, which tracks mortgage fraud risk, showed that at the end of the second quarter, one in 119 mortgage applications of all types showed signs of elevated fraud risk. But for investment properties, that ratio jumped to 1 in 44, and for properties with two to four units, it rose to one in 27 applications. (Cotality’s data does not measure confirmed fraud, and it includes both DSCR and GSE-backed investor loans).
“These two segments have historically been the most risky over the last 15+ years by roughly 3x or more,” said Matt Seguin, senior principal of mortgage fraud solutions at Cotality. “We’ve seen within our consortium data that the portion of volume in those two segments has gone from about 7% of the total volume in 2024 to about 12% in 2026, a 58% increase in a couple years when combining the two segments.”
While Cotality tracks six distinct categories of fraud risk — income, occupancy, undisclosed real estate debt, identity, property and transaction — only one category saw a bump in the second quarter. Undisclosed real estate debt risk rose 2.6% year over year.
“This is pertinent as these alerts are 2.5 times more likely to fire on an investment property versus an owner-occupied property based on our research,” Seguin explained, noting that the spike correlates directly with the surging market share of investment and multiunit applications.
On the front lines, lenders are on alert for altered documents, artificially inflated appraisals, straw buyers masking hidden third parties and “reverse occupancy” fraud, where the investor secretly lives in the rental unit. To fight back, the industry is increasingly using technology. Lenders are deploying algorithms, database sweeps, LLC cross-checks and digital photo analysis to catch fraudsters.
Under the microscope
But not everyone is playing by the exact same rulebook.
“There are a lot of originators out there who’ve done work post-Baltimore, but the quality varies. There are people who are doing it really well; there are people who aren’t doing as good of a job,” said Ramon Bullard, vice president of U.S. residential mortgage-backed securities (RMBS) ratings at Moody’s Ratings.
Moody’s published a report in late August that included the underwriting practices of roughly 30 DSCR lenders and aggregators across calculations, floors, reserve requirements and guarantees. The ratings agency found a highly fragmented market where many lenders have embraced noticeably “weaker” standards.
For example, 30% of programs allow borrowers to use the higher of appraised value and actual rent without a cap; 40% permit DSCR floors between 0.75 and 0.99; 73% allow cash-out proceeds to satisfy reserve requirements; and half don’t mandate personal guarantees from majority owners.
Despite these stretched underwriting guidelines, the bottom hasn’t fallen out. Actual losses remain remarkably low, according to industry experts. Personal recourse guarantees helps, with 93% of reviewed programs requiring a personal guarantee on loans to LLCs — which is used as leverage to compel repayment and avoid foreclosure.
“If you look at the CLTV (combined loan-to-value) of a lot of these DSCR loans in the pool, you’re talking about high 60s to low 70s, so that is a borrower who is putting 30% down,” said Karandeep Bains, head of U.S. RMBS at Moody’s Investors Service.
“These are borrowers that have significant skin in the game and have sufficient resources to make a substantial equity investment. But, all things equal, you’d rather want to see underwriting guidelines that are in the strong category.”
The BofA report reveals that cumulative losses across the broader non-QM sector sit at 3.6 basis points, covering roughly $281 billion in securitized originations since 2018. Out of 580,000 loans, about 1,000 have incurred cumulative losses topping $10,000. And while 30-day-plus delinquencies for investor loans peaked in May 2025, they remained below 6%.
For now, market watchers largely view the Baltimore fraud case as an isolated, bad-actor scenario rather than a symptom of systemic issues. And for the originators writing these loans, the ultimate takeaway is about vigilance, not retreat.
“The lesson I probably take from Baltimore is, it’s not that DSCR loans are bad, it’s just that transparency, verification, all that just has to keep pace with innovation of new loan programs,” Washburn said. “The overwhelming majority of DSCR borrowers are responsible real estate investors providing housing for their communities, and I wouldn’t want a fraud case to define the product.”
