Choosing between a DSCR loan and a conventional loan is one of the first structural decisions a rental property investor makes. The wrong choice does not just cost money on rate; it can stall a deal entirely when your personal income profile does not fit the underwriting model. Below is a direct comparison of how each loan type works, what each costs, and which situations favor one over the other.
What Is a DSCR Loan?
A DSCR loan (Debt Service Coverage Ratio loan) is a non-QM (non-qualified mortgage) product built specifically for investment property. The lender qualifies the loan based on the rental income the property generates, not the borrower's personal income.
The formula is straightforward:
DSCR = Net Operating Income (NOI) / Annual Debt Service
As an example: a rental generating $48,000 per year in NOI against a $36,000 annual mortgage payment produces a DSCR of 1.33. Most lenders set a minimum DSCR between 1.20 and 1.25, though some portfolio lenders will close loans at 1.0 (break-even) for borrowers with strong credit and larger down payments.
Key characteristics of DSCR loans:
- No personal income documentation required (no W-2s, no tax returns)
- Eligible for LLC, LP, or corporate entity ownership
- No cap on the number of financed properties
- Available for single-family rentals, small multifamily (2-4 units), and short-term rentals using market rent schedules or Airbnb income history
- Prepayment penalties typical: 3-year or 5-year step-down structures are common
- Interest rates generally run 7-9% depending on credit score, LTV, and property type (as of mid-2025)
- Maximum LTV typically 75-80% for purchases; 70-75% for cash-out refinances
