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DSCR Loan vs Conventional Loan: 5 Main Differences

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5 key differences between a DSCR loan vs a conventional loan.

Conventional loans have a uniform underwriting process – which is usually long, detailed, and requires a lot of paperwork. DSCR loans, on the other hand, can be simpler. They’re more relaxed on income requirements, and they generally care more about the property itself than you as a borrower.

But what are some other differences between these two loan types? Let’s look at 5 ways a DSCR loan differs from a conventional loan.

1. Loan Limit

DSCR loans are great if you’ve maxed out the amount of conventional loans you can get. Conventional loans have a limit of 10 per person. Once you’ve reached that limit, you need to start looking for alternative options (like DSCR loans).

2. Credit Score

With most conventional loans in this economy, you’ll have a hard time getting any loans if your credit score is lower than 660.

With DSCR loans, the higher your credit score, the better. However, even people with lower credit scores (660 and below) have options with DSCR.

Keep in mind, a lower credit score means a more expensive loan. A more expensive loan will lower your cash flow. Lower cash flow might disqualify you for the loan.

For example, instead of a 7.5% interest rate, a poor credit score could only get you a 9.5%. A 9.5% interest rate might raise your monthly payment by $250. An extra $250 per month might put your debt ratio at 1 or below.

3. Holding a Property with a DSCR Loan vs Conventional

This is another area where DSCR loans differ from conventional loans: DSCRs come with prepayment penalties. This means if you pay them off before 3 or 5 years (whatever period is decided by the lender), then you get charged a hefty fee.

DSCR loans are best for people who want to hold the property, and not refinance or sell within the prepay period. Conventional loans have no restrictions on when you pay them off.

4. Property Condition

DSCR loans aren’t good for fix and flip properties. A DSCR property should need no work – it should be turnkey, totally ready. This means you should use a DSCR loan on either rental-ready purchases or a refinance on a completely renovated BRRRR-style rental.

Conventional loans are much the same. Your ability to use a traditional loan on a value-add property is restricted by the purchase price, fix-up price, and more.

5. Interest-Only Options

Lastly, DSCR loans are good for someone looking for interest-only payments. Banks and conventional loans don’t offer interest-only options. Doing interest-only improves your cash flow, giving you 5-10 years where you don’t have to pay any principal.

More on DSCR Loan vs Conventional Loan

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What Should Your Income Look Like for a DSCR Lender?

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5 important things to know about DSCR lender income requirements.

Compared to lenders of conventional loans, any DSCR lender will have unexpected guidelines when it comes to income. The qualifications they need from you, plus the kind of income they need from your property is unlike any traditional loan.

Let’s go over 5 key points about DSCR lenders and income.

5 Things To Know About a DSCR Lender & Income

1. YOUR Income

DSCR loans are best for borrowers whose current income over the last two years doesn’t qualify for either a conventional loan or a loan from a local bank.

If your tax returns are low over the last two years, that’s where a DSCR loan might come in for your rental property.

2. Business History

Many real estate investors are new, so they don’t have two years’ worth of tax returns for their business.

With DSCR loans, the length of your business does not matter. You could have opened the LLC the morning you close on the loan. Banks need your business information because they’re lending based on you. DSCR lenders don’t because they’re lending based on the property.

3. Employment Gaps

In the same vein as the first two items, DSCR loans are great for people who just changed jobs, moved, or haven’t had a continual work history for the past two years.

A conventional bank won’t be understanding about career shifts or gaps in work. But they won’t impact your ability to get a DSCR loan.

4. Investing History

Traditional lenders can be hard on new real estate investors. They want to see past successful projects in order to trust you. DSCR loans, though more designed for investment properties, don’t care about your past real estate investing history.

5. Cash Flow on a DSCR Loan Property

To get a great DSCR loan, the rental property must cash flow. While there are some DSCR loans available for negative cash-flowing properties, you’ll only get the best rates and terms when you have positive cash flow.

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