DSCR loan vs hard money loan
A hard money loan is short-term money to buy, renovate or carry a property, sized on the property and repaid when you sell or refinance. A DSCR loan is a long-term rental loan, based on the property’s rent instead of your personal income. Many investors use both: one to buy and fix, the other to keep. Both are offered by Fidelity Residential, a licensed direct mortgage lender, for business purposes only.
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Fidelity Residential · NMLS #103098 · Equal Housing Lender
One is for buying and fixing, the other for keeping
Neither loan starts from your personal income. The difference is time and what the lender reads about the property.
A hard money loan is short-term. It is sized mainly on the property: what it is worth now, its value after any work, and what the whole project costs. You pay interest only each month and repay the balance at the end of a term measured in months, when you sell or refinance. When the property needs work, the renovation money is held back and released in draws as each stage is finished and inspected.
A DSCR (debt service coverage ratio) loan is long-term. It reads the property’s rent, from the lease or the appraiser’s rent schedule, against the full monthly payment of principal, interest, property taxes, insurance and any association dues, with no tax returns or pay stubs. It suits a property that is rented or ready to rent.
So the question is where the property is in its life. If it needs buying fast or fixing, a hard money loan fits. If it is ready to earn rent and you plan to keep it, a DSCR loan fits. Many investors use one after the other: a hard money loan to buy and renovate, then a DSCR loan to replace it once the property is rented.
At a glance
- Hard money loan: short-term, sized on the property’s value and the project cost; interest only; renovation money in draws; often closes in about 7 to 10 days once the appraisal or valuation and the title are in
- DSCR loan: a long-term rental loan based on the rent compared with the full monthly payment; no tax returns or pay stubs; often about two to three weeks once the file is complete
- Both: business purpose only; usually borrowed through a company; the property is never your home
DSCR loan and hard money loan compared
The questions that separate a short-term property loan from a long-term rental loan.
| Question | Hard money loan | DSCR loan |
|---|---|---|
| What it is for | Buying, renovating, building or carrying a property for a short time, until you sell or refinance | Buying or refinancing a rental you plan to keep for the long term, including taking cash out |
| How it is sized | On the property’s value before and after the work and on the total cost | On the property’s rent compared with its full monthly payment |
| Your personal income | Not the starting point | Not used; no tax returns, pay stubs or debt-to-income ratio |
| What the lender checks | Your record of completed projects, credit and background, recent bank statements, the purchase contract and a line-by-line rehab budget when there is work | The rent, your credit and recent housing payments, money for the down payment, closing costs and reserves, and the appraisal with a rent schedule |
| Renovation money | Held back and released in draws as the work is done and inspected | Not part of the loan; the property is rented or ready to rent |
| Payments and term | Interest only each month; the balance is repaid at the end of a term measured in months | A long-term mortgage, repaid over many years; some programs offer an interest-only period |
| Prepayment penalty | Generally none | Many have one in the first years, where the law allows; options without one exist |
| How fast it can close | Often in about 7 to 10 days once the appraisal or valuation and the title are in | Often about two to three weeks once the file is complete |
| The way out | Selling the finished property, or refinancing into a long-term rental loan, such as a DSCR loan, once it is rented | None needed: it is the long-term loan; you keep the property and the rent carries the payment |
Business purpose investor loans are for investment property only. Nobody on the loan may live in the property.
Both loan pages show the program terms in figures, dated: hard money loan terms and DSCR loan terms.
When a hard money loan fits better
When speed matters, the property needs work, or you plan to sell.
- The property needs work. The renovation money is held back and released in draws as each stage is finished and inspected.
- You need to close quickly. Because the loan rests on the property rather than on your tax returns, there is less paperwork to review.
- You plan to sell. A flip is repaid from the sale, so a short-term loan matches the plan.
- It is not rented yet. Short-term money carries the property while you renovate or find tenants.
When a DSCR loan fits better
When the property earns rent and you plan to keep it.
- It is rented or ready to rent. The rent from the lease or the appraiser’s rent schedule carries the loan.
- You plan to hold it. A long-term loan can stay in place for as long as you keep the rental.
- You finished a renovation. If you bought and renovated with a short-term loan and decide to keep the property, a DSCR loan can replace it once the property is rented.
- Your tax returns do not tell the story. The rent replaces your income, so write-offs on your returns do not hold the loan back.
How to choose between them
Look at the property today
Needs work, or not yet rented, points to a hard money loan. Rented or ready to rent points to a DSCR loan.
Decide sell or keep
Selling points to a short-term loan. Keeping points to a long-term rental loan, now or after the work is done.
Plan both loans together
If you plan to buy, fix and keep, plan the DSCR refinance from the start, so the rent and the finished value support it.
Run the numbers
Try the fix and flip calculator for the short-term loan and the DSCR calculator for the long-term one.
Questions about DSCR and hard money loans
What is the difference between a DSCR loan and a hard money loan?
Time and what the loan is sized on. A hard money loan is short-term, sized on the property’s value and the project cost, interest only, and repaid when you sell or refinance. A DSCR loan is a long-term rental loan sized on the property’s rent compared with its full monthly payment.
Can I refinance a hard money loan into a DSCR loan?
Yes, that is a common path. If you bought and renovated with a short-term loan and decide to keep the property, a DSCR loan can replace the short-term loan once the property is rented. Plan it from the start, so the rent and the finished value support the new loan.
Do either of them use my tax returns?
Neither starts from your personal income. A hard money loan rests on the property and the project; a DSCR loan uses the rent instead of tax returns or pay stubs. Your credit, your funds and the property are still checked on both.
Which one closes faster?
A hard money loan often closes in about 7 to 10 days once the appraisal or valuation and the title are in. A DSCR loan often takes about two to three weeks once the file is complete; the appraisal, with its rent schedule, and the title work can move it.
Is there a prepayment penalty?
Hard money loans generally have none. Many DSCR loans have a prepayment penalty in the first years, where the law allows one; options without one exist, and your terms are in writing before you commit.
Can I use either for a home I live in?
No. Both are business-purpose loans for investment property, and nobody on the loan may live in the property.
Do I need a company to borrow?
Usually, yes. These are business-purpose loans, so investors normally borrow through a company such as a limited liability company. The property is an investment and never your home.
Do you lend in my state?
Fidelity Residential is licensed in many states, and business-purpose investor loans have their own state list, which differs from our consumer list. The full, current license list is on NMLS Consumer Access (opens in a new tab), or call us at 732-686-9999 and a loan officer confirms your state.
Have a deal to size up?
Request a quote, apply online, or talk the deal through with a licensed loan officer.
This page is general information, not a commitment to lend. Programs, terms and eligibility depend on the property, your experience, credit and underwriting review and are subject to change without notice. Business purpose investor loans are for investment property only.
Reviewed by Robert Shamie, CEO, NMLS #241428 · Last reviewed:
Fidelity Residential (PFN Lending Group, Inc., NMLS #103098) is a direct mortgage lender licensed in 40 states and the District of Columbia, with 26 years in business.