A DSCR loan may be a better fit for an investment property if you want to qualify based on rental income. A conventional loan may be more cost-effective if you have steady, documented income and meet the lender’s debt-to-income requirements. Both can finance a rental property, but differences in eligibility and loan costs can affect how much you can borrow and what you’ll pay over time. This guide compares the two options to help you choose financing that fits your qualifications and plans for investing in a property.
Why you can trust Fit Small Business
My knowledge spans five years as a financial professional, working in various roles within the banking industry.
I am committed to delivering expertise-led answers to your small business questions and helping you understand all things business finance.
I ensure that the best answers I provide are based on accuracy, clarity, authority, objectivity, and accessibility. These are aligned with the Fit Small Business Editorial Policy.
- Specialize in CRE, financial analysis, and banking operations
- Worked as a Credit Analyst, Loan Administrator, and Bank Teller
- Have been writing B2B finance content since 2024
DSCR loan vs conventional loan at a glance
DSCR loans focus on whether a property’s rental income supports its loan payments. Conventional investment property loans evaluate your personal income and existing debts, although eligible rental income can also help you qualify.
DSCR loans | Conventional investment property loans | |
|---|---|---|
| Qualification basis | Primarily the property’s rental income relative to its required payments | Your documented income, debt-to-income ratio, and overall finances |
| Income documentation | Generally doesn’t require personal tax returns or pay stubs, but rental income must be supported | Requires income verification and supporting documents for any rental income used to qualify |
| Credit requirements | Credit affects eligibility, rates, and available financing | Credit affects eligibility, rates, and available financing |
| Down payment | Vary by lender, credit profile, and property DSCR | Vary by loan program, property type, and borrower profile |
| Rates and fees | Often higher than conventional financing | May offer lower costs for borrowers who qualify |
| Loan terms | Fixed-rate, adjustable-rate, and interest-only options may be available | Fixed-rate and adjustable-rate options are most common |
| Financing multiple properties | Subject to lender exposure limits and property qualifications | Subject to program limits, DTI requirements, and additional reserves |
| Prepayment penalties | May apply, depending on the loan terms | May apply, depending on the loan terms |
DSCR loan overview
A debt service coverage ratio loan, or DSCR loan, is a type of investment property financing that’s based primarily on its rental income. Essentially, the lender evaluates whether the property’s income supports its required payments.
For residential rentals, lenders commonly divide qualifying monthly rent by the monthly principal, interest, taxes, insurance, and applicable association dues. For example, $3,000 in qualifying monthly rent divided by $2,500 in monthly payments produces a DSCR of 1.20. That means rent exceeds those payments by 20%. That said, minimum requirements and calculation methods vary by lender.
Your credit score, down payment, and cash reserves can still affect eligibility and the terms offered. You’ll also need documentation supporting the property’s value and rental income, such as an appraisal and lease agreement, when applicable.
DSCR loans can be used to purchase a rental property or refinance one you already own. Many lenders also allow borrowing through an eligible LLC. However, approval doesn’t establish that the investment will be profitable. You’ll need to account for vacancies and operating expenses beyond those included in the lender’s calculation.
DSCR loan pros & cons
Pros | Cons |
|---|---|
| Qualifications are based mainly on rental income | Often has higher rates and fees than conventional financing |
| Interest-only options may lower initial payments | Low qualifying rental income can limit the loan amount or require a larger down payment |
| Can provide long-term financing after a rental property’s renovation is complete | Still requires acceptable credit, sufficient cash, and an eligible property |
Who a DSCR loan is right for
Consider this option if you’re:
- Self-employed with substantial business deductions. Your tax returns may show less qualifying income than your earnings suggest. A DSCR lender primarily evaluates the rental property’s income instead.
- Expanding an existing rental portfolio. Additional mortgages can make conventional qualification more difficult. DSCR financing may offer another path, subject to the lender’s exposure limits.
- Moving a renovated property into long-term financing. Once repairs are complete and rental income can be supported, a DSCR loan may allow you to replace short-term renovation financing.
- Purchasing through an LLC. A lender that accepts entity borrowers may accommodate your ownership structure, although a personal guarantee may still be required.
Before choosing this option, compare its costs with any conventional financing you qualify for. Consider how long you expect to keep the loan, especially if selling or refinancing could trigger a prepayment penalty.
How to get a DSCR loan
You can apply for a DSCR loan through a lender that offers investment property financing or a mortgage broker with access to DSCR programs. Before applying, gather the property’s purchase details or current mortgage information, along with any existing lease agreements. If the property isn’t leased, ask how the lender determines qualifying rent.
The lender will typically review your credit and order an appraisal to assess the property’s value and rental income. You may also need bank statements showing funds for the down payment, closing costs, and required reserves. If you’re borrowing through an LLC, expect to provide formation and ownership documents.
When comparing offers, ask how the lender calculates DSCR and whether the quoted terms include points or a prepayment penalty. Review the estimated monthly payment and total cash needed to close before committing.
Kiavi offers DSCR rental loans for investment property purchases and refinancing, with qualification based primarily on the property’s rental income. Investors considering this approach can review Kiavi’s eligibility requirements and available terms alongside other financing offers. |
|---|
Conventional investment property loan overview
A conventional investment property loan is a mortgage used to purchase or refinance a rental property. (For this comparison, conventional investment property loans refer to mortgages that follow Fannie Mae or Freddie Mac guidelines.) Approval depends on your documented income and financial obligations, along with the property’s eligibility.
The lender uses your debt-to-income ratio, or DTI, to assess whether you can afford the proposed mortgage alongside your existing debts. Eligible rental income may help you qualify, but the amount counted depends on the required documentation and program rules.
Investment property requirements differ from those for a primary residence. Down payment and reserve requirements depend partly on the number of units and whether you’re purchasing or refinancing. Having other financed properties can also increase the reserves you need.
Conventional investment property loans typically offer fixed-rate and adjustable-rate options. A fixed rate keeps principal and interest payments consistent, although taxes and insurance can change. Borrowers who qualify may receive lower rates and fees than with DSCR financing, making conventional investment property loan offers worth comparing before choosing a loan.
Conventional loan pros & cons
Pros | Cons |
|---|---|
| Eligible personal income may help you qualify when rent alone wouldn’t support a DSCR loan | Income documentation can be more involved for self-employed investors |
| Generally allows selling or refinancing without a prepayment penalty | Existing debt can reduce the amount you qualify to borrow |
| Available through many banks, credit unions, and mortgage lenders, giving you more offers to compare | Reserve requirements can leave less cash available for other investments |
Who a conventional loan is right for
Consider this option if you’re:
- Buying your first rental while maintaining steady employment. Documented earnings may help support approval while you establish a rental income history.
- Keeping a small rental portfolio. If your existing debts and reserves meet program requirements, a conventional investment property loan may accommodate your next purchase.
- Planning to sell or refinance within a few years. A loan without a prepayment penalty can give you more flexibility to change financing or exit the investment.
If you qualify for both options, compare offers for the same property and down payment. The better choice will depend on the total borrowing cost and how long you expect to keep the loan.
How to get a conventional investment property loan
You can apply for a conventional investment property loan typically through a bank, credit union, or mortgage lender. A mortgage broker can also help you compare programs. Tell the lender upfront that the property will be a rental, since investment property requirements differ from those for a primary residence.
Prepare documents supporting your income and available funds, such as pay stubs, tax returns, and bank statements, as applicable. If you own other rentals, the lender may request lease agreements and mortgage statements to assess their income and obligations.
During underwriting, the lender will review your finances and obtain an appraisal. If you’re using income from the property to qualify, additional rental documentation may be required. Ask how much rent the lender can count and whether you’ll need reserves for other financed properties.
Compare written estimates using the same loan amount and repayment term. Review lender fees and points alongside the interest rate, and confirm the total cash needed to close. Avoid taking on new debt during the application process, since changes to your financial profile can affect approval.
Frequently asked questions (FAQs)
Can rental income help you qualify for a conventional investment property loan?
Yes. Eligible rental income can help you qualify, but the lender must document it and apply the program’s calculation rules. You may not be able to count the full monthly rent.
Can you get a DSCR loan for your first investment property?
Yes, some lenders accept first-time investors. Others require investment property experience, so confirm eligibility before applying.
Can you use a DSCR loan for a property you’ll live in?
DSCR rental loans generally require a non-owner-occupied investment property. If you plan to live in one unit and rent out the others, ask about owner-occupied financing instead.
Can you refinance a DSCR loan into a conventional investment property loan?
Yes, provided you and the property meet the new lender’s requirements. Check your existing loan for a prepayment penalty and compare refinancing costs with the expected savings.
Bottom line
A DSCR loan may be the better fit if the property’s rental income supports financing but your personal income or existing debts make conventional approval difficult. A conventional investment property loan may cost less if you meet its qualification requirements. If both are available, compare written offers for the same property and consider how much cash you’ll have left after closing. Choose terms that support your expected ownership period while leaving room for vacancies and repairs.
Also read…