INVESTOR GUIDE · DSCR VS CONVENTIONAL
DSCR vs. conventional loans
Which one should an investor use? If you’re going to live in it, go conventional. If it’s an investment property, a DSCR loan wins seven days a week.
The short answer
- Buying the home you’ll live in, or your first home with a low down payment? Stay conventional. You can get in with as little as 3% or 5% down.
- Buying or refinancing an investment property? DSCR beats conventional. There’s no competition.
- Rates are very similar. The real difference is qualifying: a conventional loan can die a thousand ways, and a DSCR loan qualifies on the property.
WHEN TO STAY CONVENTIONAL
Your primary residence and your first home
If you’re buying the home you’ll live in, a conventional loan should be your vehicle. That’s especially true for a first-time home buyer who wants a low down payment: conventional loans can get you into a primary residence with as little as 3% or 5% down. DSCR loans are business-purpose loans for investment property, so they aren’t built for that job.
WHEN DSCR WINS
Investment property: DSCR, seven days a week
Once it’s an investment property, DSCR beats conventional every day of the week. Rates are very similar. Where they split is everything it takes to get to the closing table.
WHY CONVENTIONAL LOANS FALL APART
There are a thousand ways a conventional loan can die
A conventional loan qualifies you. That means every part of your financial life gets a vote:
- Credit score. Conventional takes the lower of the two borrowers’ middle scores. One weaker co-borrower sets the price for the whole loan.
- Debt-to-income ratio. Anything over 50% likely disqualifies you, and 45% to 50% is still a very hard place to qualify.
- Income and employment history. Generally two years of stable employment and income, plus how you’re paid, and whether overtime and bonuses have the history to count.
- Down payment. It has to be sourced and seasoned: where did it come from, and how long has it been there?
- Assets and reserves. Every account gets reviewed, and you document where the money came from and how long it’s been there.
- Property and loan limits. The property has to pass a conventional appraisal, and conforming and jumbo loan limits cap the loan amount by area. In some markets, the deal simply exceeds them.
What a DSCR loan looks at instead
- The property’s rent divided by the monthly payment. That’s the qualifying ratio.
- Credit: the middle score of the highest-credit borrower in the entity, not the lowest.
- No debt-to-income ratio, no tax returns, no pay stubs, no employment history.
- Down payment and reserves are still documented on a purchase, but your income isn’t.
- Closes in your LLC.
SIDE BY SIDE
DSCR vs. conventional at a glance
| DSCR loan | Conventional loan | |
|---|---|---|
| Best for | Investment property | Your primary residence |
| Qualifies on | The property’s rent | Your income and debt |
| Credit score used | Middle score of the strongest borrower | Lower middle score of the two borrowers |
| Tax returns and pay stubs | Not required | Required, with 2 years of history |
| Debt-to-income limit | None | Over 50% likely disqualifies |
| Loan limits | Not tied to conforming limits | Conforming and jumbo limits by area |
| Close in an LLC | Yes | No |
| Rates | Very similar | Very similar |
See exactly what a DSCR loan takes in our DSCR loan requirements.
STRAIGHT ANSWERS
DSCR vs. conventional questions
Are DSCR loan rates higher than conventional rates?
Rates on DSCR and conventional investment-property loans are very similar. The difference is qualifying: a DSCR loan qualifies on the property’s rent instead of your income and debt.
Can I use a DSCR loan on my primary residence?
No. DSCR loans are business-purpose loans for investment property only. For a home you’ll live in, a conventional loan is the right tool.
Is a DSCR loan better than conventional for rental property?
For investment property, yes. There’s no income documentation, no debt-to-income limit, the loan can close in your LLC, and far fewer things can kill the deal.
Which credit score does a DSCR loan use?
A DSCR loan can use the middle of three credit scores from the highest-credit borrower in the entity. A conventional loan takes the lower of the two borrowers’ middle scores.
KEEP READING
DSCR KINGS · INVESTOR FINANCING
See what your rental qualifies for
Send us the property and the rent. We’ll show you the DSCR terms. No credit pull to start.
Business-purpose loans for investment properties only; not for owner-occupied homes. Lending guidelines, leverage and loan programs vary by lender and by state and are subject to change. Terms and approval depend on the property, the borrower’s credit and capital-partner guidelines and are not guaranteed. Examples are for illustration only.
