Investor activity is playing a crucial role in the housing market, with private lenders increasingly stepping in to provide financing where traditional banks have struggled. Non-QM lenders, particularly those offering DSCR loans, have capitalized on this demand. However, as these lenders gain market share, concerns over exposure and liquidity risks arise. Could the rapid expansion of private lending lead to financial vulnerabilities? Let’s take a look at the key trends shaping private lending in 2025.
The DSCR Loan Boom: A Double-Edged Sword?
Debt-Service Coverage Ratio (DSCR) loans have become the preferred financing tool for real estate investors. These loans, which qualify borrowers based on rental income rather than personal income, have experienced explosive growth. According to ATTOM Data Solutions, investor purchases accounted for 26% of all single-family home sales in Q3 2024, highlighting the demand for investor-friendly financing.
What follows are the top reasons why DSCR loans are gaining market share:
No personal income verification: Investors can qualify based on rental income, making these loans ideal for those with non-traditional income streams.
Flexibility in underwriting: Compared to conventional loans, DSCR lenders offer higher LTVs and fewer restrictions on property types.
Strong investor demand: The rise of short-term rentals and long-term rental strategies like “BRRRR” (Buy, Rehab, Rent, Refinance, Repeat) has fueled demand for these loans.
According to recent data, DSCR loan originations surged in 2024, reflecting a broader investor shift away from conventional loans. The growth in DSCR lending is also fueled by rising rents, which help investors meet lender coverage ratios. However, the boom in DSCR loans has also introduced risks.
The rapid expansion of DSCR loans has drawn comparisons to the pre-2008 subprime mortgage boom. While DSCR lending is fundamentally different due to its reliance on rental income, some analysts warn that lax underwriting in certain markets may lead to higher delinquency rates. A report from Moody’s Analytics in late 2024 projected a potential increase in DSCR loan defaults in markets where rental demand has softened, or regulatory changes have impacted short-term rentals. Cities like Austin and Nashville, which saw a rapid increase in investor purchases, are now experiencing rising vacancy rates in short-term rental properties. If this trend continues, some DSCR investors could struggle to meet their debt obligations, creating stress points for private lenders.
Fix-and-Flip Lending: The Rise of Institutional Capital
Fix-and-flip investors are also reshaping private lending. While banks have historically struggled to finance distressed properties, institutional capital has stepped in, making fix-and-flip loans more viable through securitization of Residential Transition Loans (RTL). What follows are the top trends in fix-and-flip financing:
Securitization of RTL loans: Larger non-QM and private lenders are increasingly bundling fix-and-flip loans into securities, providing liquidity and making these loans more attractive to institutional investors. According to Kroll Bond Rating Agency (KBRA), RTL securitization volumes surpassed $7 billion in 2024, reflecting institutional appetite for these assets.
Hybrid capital stacks: Investors are using combinations of private debt, institutional secondary market funding, and mezzanine financing to optimize leverage.
Increased use of short-term bridge loans: Fix-and-flip loans with 12- to 24-month terms allow investors to complete renovations and refinance into DSCR or traditional loans.
Private lenders stepping in: With institutional lenders pulling back, private lending firms have become a primary source of capital for real estate investors.
Despite strong demand, liquidity concerns loom. If capital markets tighten further, fix-and-flip lenders may have difficulty recycling funds, leading to potential constraints for borrowers. A report from CoreLogic found that default rates on short-term investment loans increased by 15% in high-risk markets in late 2024, signaling potential stress in the sector. Additionally, construction material costs, while stabilizing, remain 20% above pre-pandemic levels, impacting renovation budgets and overall investor returns.
The Liquidity Crunch: Is Private Lending Over-Leveraged?
Liquidity is the lifeblood of private lending. The ability to originate loans depends on capital availability from warehouse lenders, secondary market buyers, and institutional partners. However, recent trends suggest the following potential challenges:
Declining investor appetite: Some institutional buyers are reducing their exposure to non-QM and DSCR loan-backed securities. In 2024, the securitization volume of DSCR loans dropped significantly compared with the previous year.
Higher capital costs: Rising interest rates have made it more expensive for private lenders to raise funds, squeezing profitability. According to the Mortgage Bankers Association, the average cost of capital for non-QM lenders increased by 80 basis points in 2024.
Tighter warehouse lending terms: Some warehouse lenders are requiring more conservative advance rates, making it harder for non-QM lenders to maintain liquidity.
Over-leveraging in risky markets: Some lenders are becoming overexposed in markets with inflated property values. In regions like Cape Coral, Fla., where home prices surged rapidly, some lenders have experienced significant losses as property values stagnate or decline.
According to Redfin, Cape Coral saw a 9% drop in median home prices in the fourth quarter of 2024, creating challenges for investors needing to refinance.
Additionally, concerns over loan repurchases have emerged. Some non-QM lenders are being forced to buy back DSCR and fix-and-flip loans that failed to meet secondary market performance expectations. This could further strain liquidity for mid-sized private lenders who lack deep capital reserves.
What’s Next for Non-QM and Private Lending?
The strong performance of investment property purchases is a positive sign for the private lending market. However, lenders must be cautious of regions that experienced high home price inflation during COVID-19. Many investors who purchased properties with five-year adjustable-rate mortgages are now facing refinancing challenges as loan-to-value ratios no longer align with market conditions. This could lead to increased loan defaults or forced sales, particularly in overheated markets.
Lenders and mortgage brokers should remain vigilant, ensuring they work with partners who maintain disciplined underwriting while offering competitive financing solutions. The key to navigating 2025 will be a balanced approach – leveraging new lending opportunities while protecting against liquidity risk.
The private lending landscape in 2025 presents both opportunities and challenges. While DSCR loans and fix-and-flip financing remain vital tools for investors, liquidity risks could reshape the market. Mortgage brokers and real estate investors should stay informed, monitor risk indicators, and align with lenders who balance growth with financial stability.
Zachary Cohen is managing partner at Ridge Street Capital, a private lending firm that finances investment properties for real estate investors in Florida and Texas.
