DSCR loan pros and cons
With a DSCR loan, you face a higher price, a lighter check on yourself and a stricter check on the property.
DSCR loan vs conventional, side by side
| Point | DSCR loan | Conventional investment loan |
|---|---|---|
| Qualifies on | The property's rent over PITIA | Your income and debts |
| Tax returns | Usually not asked | Two years, usually |
| Title in an LLC | Often allowed | Not allowed |
| Number of financed homes | No agency cap | Agency limit of 10 |
| Rate | Higher | Lower |
| Down payment | 20% to 25% or more | 15% to 25% |
| Prepayment penalty | Common for 3 to 5 years | Rare |
The advantages of a DSCR loan
When the rent qualifies the loan, a self-employed buyer can still borrow even if write-offs leave little income on the tax returns. Owners with many rental properties keep buying beyond the 10-property agency limit. The loan can close through an LLC (limited liability company), which for most purposes keeps the rental's debt out of the owner's personal file.
Since no income needs checking, closing can also move faster. The appraisal, rent schedule and title work set the pace.
The drawbacks of a DSCR loan
For the same borrower, the rate on a conventional investment mortgage is lower, often by a full point or more. A prepayment penalty applies to most DSCR loans during the first 3 to 5 years, so an early sale or refinance leaves you paying that cost. A thin ratio pushes the down payment higher, and it is rarely below 20%.
The loan also relies on how much rent the lender will accept. When the appraiser's market rent is lower than the lease you expected, both the ratio and loan amount drop near the end of the process.
When a DSCR loan works, and when it is not the right choice
A DSCR loan suits an investor who already owns several rentals, works for themselves or wants title in an LLC, and has a property that clears at least 1.00 with room left over. When a salary easily covers a conventional investment loan, buyers will usually pay less through that route, even with the paperwork involved.
Enter both payments in our DSCR calculator to see the ratio. Read our DSCR requirements to learn what the file needs.