DSCR loan vs conventional investment property loan
A DSCR loan finances a rental on the property’s own rent compared with its full monthly payment, with no tax returns or pay stubs. A conventional investment property loan is a standard mortgage on a rental, underwritten on your own income, debts and credit. Here is how they differ, when each one fits, and how to decide.
Prefer to talk? Call 732-686-9999
- Direct, licensed mortgage lender
- NMLS #103098
- Equal Housing Lender
Compare with your own numbers
Run the property’s numbers both ways, then talk them through with a licensed loan officer.
Fidelity Residential · NMLS #103098 · Equal Housing Lender
What the lender reads is the difference
Both loans can buy or refinance a rental property. The difference is what the lender reads to decide whether the loan works.
A conventional investment property loan reads you: your pay stubs and W-2 forms or tax returns, your debts and your credit, like any standard mortgage. A DSCR (debt service coverage ratio) loan reads the property: its rent, from the lease or the appraiser’s rent schedule, compared with the full monthly payment of principal, interest, property taxes, insurance and any association dues. On both, your credit, the money for the down payment and savings, and the appraisal are checked.
The terms usually differ too, including what the loan costs and how much you put in, because the lender is taking a different kind of risk. The fair test is to price both for the same property.
At a glance
- DSCR loan: a business-purpose mortgage on a rental, based on the property’s rent instead of your personal income; for investment property only.
- Conventional investment property loan: a standard mortgage on a rental, based on your documented income, debts and credit.
- Checked on both: credit, money for the down payment and closing costs, savings after closing, and the appraisal.
DSCR loan and conventional loan compared
The same rental can often be financed either way. These are the questions that separate them.
| Question | DSCR loan | Conventional investment property loan |
|---|---|---|
| How income is shown | The property’s rent compared with its full monthly payment; no tax returns, pay stubs or debt-to-income ratio | Your own income, documented with pay stubs and W-2 forms or tax returns, with your debts compared with that income |
| What the lender checks | The rent, your credit and recent housing payments, money for the down payment, closing costs and reserves, the appraisal with a rent schedule, and landlord experience where the program asks | Your income, debts and credit, the down payment and savings after closing, and the appraisal |
| Who it suits | Investors who own several rentals, whose tax returns show less income after write-offs, or who hold title in a company | Investors whose tax returns show their income and who have few other financed properties |
| Property types | Rental houses, townhouses, condos and small buildings, with larger residential and mixed-use buildings and short-term rentals through some programs | A rental house or a small multi-unit building, under standard conventional rules |
| How title is held | In your own name or in a company, such as a limited liability company, with the owners giving a personal guarantee | Normally in your own name, and the property counts toward the limit on how many financed properties one borrower can hold |
| Typical uses | Buying a rental, refinancing one, taking cash out, or replacing a short-term fix and flip loan once the property is rented | Buying or refinancing a rental, including a cash-out refinance |
| Things to weigh | Most programs want landlord experience and charge a prepayment penalty in the early years, where the law allows one; nobody on the loan may live in the property | Gift money cannot be used on a rental, savings after closing are required, and the number of financed properties you can hold is limited |
Business purpose investor loans are for investment property only.
When a DSCR loan fits better
When the property can carry its own payment and your tax returns tell only part of the story.
- Your tax returns show less than your rentals bring in. Write-offs that lower your tax bill can also lower the income a conventional lender can count. A DSCR loan looks at the rent instead.
- You already own several financed rentals. DSCR programs set their own limits, so an investor can keep growing after the conventional limit on financed properties is reached.
- You want title in a company. A DSCR loan can close in the name of a limited liability company, with the owners giving a personal guarantee.
- The rent covers the payment. When the rent covers the full monthly payment with room to spare, more programs fit.
- The property is a larger or mixed-use building. Residential buildings larger than a standard loan covers, and small buildings with homes and a shop or office, can be financed on the building’s rent through some programs.
- You want your rentals kept apart from your own home. A DSCR loan keeps your rental financing in a separate lane from the loan on the home you live in.
When a conventional investment property loan fits better
When your own paperwork already tells the story the lender needs.
- Your tax returns show your income. When your returns and pay stubs show what you earn and your debts leave room for the new payment, a conventional loan fits your file cleanly, and it is often the simpler choice.
- You have few other financed properties. The conventional limit on financed properties is far off, so it does not shape the decision yet.
- The rent alone is tight. A conventional loan is underwritten on your income, so a property whose rent only just covers its payment is not judged on the rent alone.
- You hold title in your own name. You are happy to own the rental personally rather than through a company.
- The property is a house or a small multi-unit building. A standard rental of the kind conventional rules cover.
Will you use the home yourself? A home you keep for your own use part of the year is a second home, not a rental, and it is financed under second-home rules. Neither loan on this page is for it: see financing a second home.
How to choose between them
Start with your tax returns
If they show the income you really earn and your debts leave room, ask for a conventional quote first.
Run the rent against the payment
Enter the rent, taxes, insurance and dues in the DSCR calculator to see how the ratio reads for this property.
Count your financed properties
Conventional loans limit how many one borrower can hold, and reserves add up across every property you own, not loan by loan.
Decide how you will hold title
Your own name or a company is a decision to make with your CPA and attorney before you buy. Then price both loans for the same property.
Questions about DSCR and conventional rental loans
What is the main difference between a DSCR loan and a conventional investment property loan?
What the lender reads. A DSCR loan is based on the property’s rent compared with its full monthly payment, with no tax returns or pay stubs. A conventional loan is based on your own documented income, debts and credit. On both, your credit, your assets and the appraisal are checked.
Are the terms of a DSCR loan the same as a conventional loan?
Usually not. The terms of a DSCR loan, including what it costs and how much you put in, usually differ from a conventional loan, because the lender is taking a different kind of risk. A loan officer can price both for the same property so you can compare them.
Can I use a DSCR loan after reaching the conventional limit on financed properties?
Yes. Conventional loans limit how many financed properties one borrower can hold. DSCR programs set their own limits, so a DSCR loan can let an investor keep growing after the conventional limit is reached.
Can a limited liability company hold title?
On a DSCR loan, yes: title can be in your own name or in a company such as a limited liability company, with the owners giving a personal guarantee. On a conventional loan the property is normally held in your own name, and it counts toward the limit on financed properties. Which is right for you is a decision to make with your CPA and attorney.
Can I take cash out of a rental with either loan?
Yes. Conventional loans and DSCR loans both offer cash-out refinances on rental property, within each program’s limits. On a DSCR cash-out the lender also asks how the cash will be used. See how a cash-out refinance works.
Can I live in a property financed with a DSCR loan?
No. A DSCR loan is for investment property only. Nobody on the loan may live in the property, even part of the year, and you sign a statement saying so. A home you will use yourself is financed as a home or a second home instead.
Not sure which loan fits your rental?
Get a quote, apply online, or ask a licensed loan officer to compare both for the property you have in mind.
This page is general information, not a commitment to lend. Programs, terms and eligibility depend on credit, income, property, rent and underwriting review and are subject to change without notice. Business purpose investor loans are for investment property only.
Last reviewed: