DSCR loan vs conventional loan: Either one can finance a real estate investment, but one will probably outperform the other.
Your best choice will depend on your unique needs.
Income documentation - Winner: DSCR
Maybe your personal income won’t support another conventional loan. Or maybe you have the income but can’t provide the right documents to prove it. In these cases, a DSCR loan is tailor-made for you.
DSCR lenders won’t ask for your tax returns, pay stubs, W2s, profit-and-loss statements, or other personal income sources.
They won’t ask for these documents because your personal or business income will not underwrite the loan. Instead, cash flow from the property you’re buying will secure a DSCR loan.
If your new rental property will earn enough monthly income to cover the loan payment that’s due on the loan each month, a DSCR lender can approve the loan, assuming it meets the lender’s other requirements. That’s how DSCR loans — or debt-service coverage ratio loans — loans work.
Down payment - Winner: toss-up
Conventional loans offer down payments as low as 3%, but only when you’re buying a home to live in. To buy an investment property with conventional financing, you’ll need to put at least 15% down. That’s $15,000 in cash for every $100,000 borrowed.
DSCR loan down payments need at least 15% down as well, but some lenders require 20% — or $20,000 per $100,000 borrowed. This gives conventional financing a slight edge, right?
Not always. A conventional with 15% down will also need private mortgage insurance payments for the first few years, inflating the loan’s monthly payment. DSCR loans don’t require PMI even with less than 20% down.
