DSCR Loan vs Conventional: Which for a Rental?
One underwrites you. The other underwrites the property. The right answer depends on which of you looks better on paper.
1.07 → 0.97
What one extra point of rate does to the same property's coverage.
The core difference
Conventional investment-property financing is consumer mortgage lending applied to a rental. The lender wants two years of tax returns, W-2s or profit-and-loss statements, and a debt-to-income ratio that works after adding the new mortgage. Rental income counts, but usually with a 25% haircut and often only if it appears on a Schedule E.
A DSCR loan flips this. The lender computes debt service coverage ratio — the property’s NOI divided by the annual payment — and lends if it clears a threshold, usually 1.00 to 1.25. Your personal income is largely irrelevant. What matters is credit score, reserves, and whether the rent covers the note.
Side by side
| Conventional | DSCR | |
|---|---|---|
| What is underwritten | Your income and DTI | The property’s rent versus its payment |
| Documentation | Tax returns, W-2s, pay stubs, bank statements | Lease or market rent schedule, credit, reserves |
| Typical rate premium over owner-occupied | 0.5 – 0.875 points | 1.5 – 2.5 points |
| Down payment | 20 – 25% (25% for 2–4 unit) | 20 – 25%, occasionally 30% for thin coverage |
| Credit score floor | 620 – 680 typical | 660 – 700 typical, with pricing tiers above |
| Property limit | Agency guidelines cap financed properties (commonly 10) | Effectively unlimited |
| Can title in an LLC | Generally no | Generally yes — a common reason to choose it |
| Prepayment penalty | Rare | Common — often 5-4-3-2-1 or 3-2-1 |
| Reserves required | 2 – 6 months PITI | 3 – 6 months PITI, sometimes more |
| Close time | 30 – 45 days | 21 – 30 days |
| Seasoning for cash-out | 6 – 12 months | Often 3 – 6 months |
What the rate premium actually costs
$180,000 loan, 30-year, on the $240,000 example (NOI $15,004)
- Conventional at 6.75% — monthly payment
- $1,167
- DSCR at 7.75% — monthly payment
- $1,290
- Difference per month
- $123
- Difference per year
- $1,476
- DSCR at 6.75% financing
- 1.07
- DSCR at 7.75% financing
- 0.97
The DSCR loan pushes this deal below a 1.00 coverage ratio.
The irony worth planning around
Which one fits you
| Choose conventional when… | Choose DSCR when… |
|---|---|
| You have W-2 income and clean, uncomplicated returns | You are self-employed and write off aggressively — low taxable income, strong cash flow |
| You are under the financed-property limit | You are at or past the agency property limit |
| You are comfortable holding title personally | You want the property in an LLC from day one |
| You may want to refinance or sell soon | You are certain about the hold — prepay penalties bite otherwise |
| The property covers the payment easily | The property covers well and your paperwork does not |
| You want the lowest possible rate | You want speed and fewer conditions, and will pay for it |
The details that decide it in practice
| Detail | Why it matters |
|---|---|
| Prepayment penalty structure | A 5-4-3-2-1 penalty means selling or refinancing in year one costs 5% of the loan balance — $9,000 on a $180,000 loan. This can quietly rule out a BRRRR or a short hold entirely. |
| How the lender computes NOI | Some DSCR lenders use only PITIA against gross rent, with no vacancy, management or reserves. That is generous for qualifying and tells you nothing about whether the deal is good. |
| Interest-only options | Improves qualifying coverage and cash flow now, at the cost of no amortisation. Model the reset payment before relying on it. |
| Recourse and personal guarantee | LLC vesting does not automatically mean non-recourse. Most DSCR loans at this size still require a personal guarantee. |
| Rate lock timing | DSCR pricing tiers off credit and coverage. A late change in either can reprice the loan days before closing. |
Price both, on the same property, on the same day
Frequently asked questions
What is a DSCR loan?
A mortgage underwritten on the property's ability to cover its own payment rather than on the borrower's personal income. The lender divides the property's net operating income by the annual debt service and lends if the resulting ratio clears their threshold, commonly 1.00 to 1.25.
Are DSCR loan rates higher than conventional?
Yes, typically by around 0.75 to 1.5 percentage points. On a $180,000 loan a one-point difference is roughly $123 a month, which is often more than the entire cash flow of a thin deal — so price the loan before committing to the purchase.
Can I get a DSCR loan in an LLC?
Usually yes, and it is one of the main reasons investors choose them. Note that vesting in an LLC does not by itself make the loan non-recourse — most DSCR loans at residential size still require a personal guarantee.
What DSCR do lenders require?
Most DSCR lenders look for 1.00 to 1.25 at minimum, with better pricing above 1.25. Some will lend below 1.00 with a larger down payment and a higher rate, which is worth treating as a signal about the deal rather than a solution to it.
How many conventional loans can I have?
Agency guidelines commonly cap the number of financed properties at ten, and many individual lenders stop sooner. Reaching that ceiling is one of the most common reasons investors move to DSCR or portfolio lending.