One of these loans is meant for rental properties, and the other is the route most potential homebuyers take. We’re exploring both types so you can make the right decision.
There are many types of mortgage loans out there, so deciphering between them can be confusing. Here, we’re concentrating on two specific types: debt-service coverage ratio (DSCR) loans and conventional loans. You may be more familiar with conventional loans, which are the most common type. However, there are times and places for DSCR loans. Both types have their pros and cons. So, join the author of this piece, who has written about the mortgage loan approval process, home equity line of credits (HELOCs), refinancing and more, as we dive into everything you need to know about a DSCR loan vs. conventional loan.
- What are DSCR loans?
- Pros
- Cons
- See All 14 Items
What are DSCR loans?
A DSCR loan, a non-qualified mortgage (non-QM) loan, is for real estate investors with a rental property they’re using for income. A crucial piece of this type of loan is that the property must have a positive cash flow. A lender will also look at your financial information, but the emphasis is on the property and whether it’s making money. This kind of loan must be used for an investment property and can’t be used as a personal residence.
“The key factor is whether the property earns enough to cover debt service and expenses, typically verified through leases. Lenders assess how long renters are contractually obligated to pay,” says Joe DiSanto, founder and CEO at Play Louder, an educational platform for financial strategy coaching.
Pros
- Designed specifically for real estate investors
- Tend to have a quicker qualification process
- Tend to be easier to qualify for
- Fewer regulatory and compliance requirements
Cons
- Higher interest rates
- Can’t be used for a personal residence
Who is a DSCR Loan Best for?
Since you can’t live in a property with a DSCR loan, it’s for those using a unit to generate income.
“DSCR loans are ideal for real estate investors who buy and hold residential properties for rental income,” says Ben Fertig, founder and president at Constructive Capital. “For investors looking to enter the rental market, DSCR loans lower the barrier of entry by focusing on the property’s income rather than the borrower’s personal finances. In fact, they’re one of the most powerful tools a real estate investor can have.”
What Are Conventional Loans?
The most common type of loan is the conventional loan. That means you have a wide range of conventional loan lenders. This type of loan is what most people seek when they’re looking to borrow money to buy a home they’ll live in.
“With conventional loans, the qualifying criteria are based on the borrower’s debt-to-income (DTI), which compares their total monthly debts—including the new mortgage payment—to their monthly income,” says Fertig. “While conventional loans can also be used by investors, there are several factors that can make them less than ideal.”
For one, a conventional loan is based on a person’s finances, not their business. That means they take on any associated risks.
Pros
- Various types of conventional loans
- Many lender options
- Tend to have solid terms
- Tend to be more flexible than government-backed loans
Cons
- May be a longer qualification process
- Not the best for investors
Who is a Conventional Loan Best for?
While DSCR loans are specifically for real estate investors, conventional loans can be used for people who plan to live in the home or for real estate investors. This type of loan doesn’t provide the same benefits as a DSCR loan, so generally, it’s best for people using the property as their primary or secondary residence.
“For those who qualify, conventional loans are generally the best option due to their favorable terms,” says DiSanto.
DSCR vs Conventional Loans
| DSCR Loans | Conventional Loans | |
| Loan Amounts | $100,000 to $5 million | No set amounts |
| Average Rates | ~7.5% | ~6.5% |
| Typical Terms | 15, 30 or 40 years | Typically 15 or 30 years |
| Secured vs. Unsecured | Secured | Secured or unsecured |
| Fees | Origination fees, appraisal fees, credit report fees, title insurance, escrow fees, recording fees, survey fees, closing costs and prepayment penalties | Origination fees, appraisal fees, credit report fees, title insurance, escrow fees, recording fees, survey fees, closing costs |
How to Choose Between DSCR and Conventional Loans
A DSCR loan doesn’t apply to your situation if you don’t have an investment property. However, regular homebuyers and real estate investors can apply for a conventional loan. The difference for the real estate investor is that instead of focusing on the income generated from their rental property, as a DSCR loan does, a conventional loan will look at their finances to decide if they’re approved.
Why You Should Trust Us
Benzinga has made it its business to dive deep into all aspects of mortgage loans and other financial topics. Around 25 million people come to us each month to ask questions. Not only are we experts ourselves, but we consult other professionals who have real-life experience to offer worthy perspectives.
Caitlyn Fitzpatrick, the author of this article, has been an editor and writer since 2014. She has years of experience interviewing experts in various professions to understand particular topics. Fitzpatrick enjoys sharing that insight with readers so they can make smart financial decisions. For this story, we talked with Joe DiSanto, founder and CEO at Play Louder, an educational platform for financial strategy coaching, and Ben Fertig, founder and president at Constructive Capital. They told us everything you need to know about DSCR loans vs. conventional loans.
The Bottom Line
Most potential homeowners will go the conventional route when it comes to a DSCR loan vs. a conventional loan. A DSCR loan is a specific type created for investment properties, and owners can’t live in them. That’s good news, as conventional loans tend to have solid terms. Just make sure you’re doing everything you can to get your personal credit profile and other signs of mortgage loan approval in tip-top shape as soon as possible.
FAQ
Are DSCR loan rates higher than conventional?
Yes, a DSCR loan typically has a higher interest rate than a conventional loan. However, Fertig explains that interest rates are less important with investment properties, as it’s more about the overall return on the investment.
What are the disadvantages of DSCR?
That higher interest rate is one of those disadvantages, but there are others to consider. “DSCR loans may not offer the best terms compared to conventional loans. Borrowers might need to supplement with some personal income qualification,” says DiSanto.
Can you live in a home with a DSCR loan?
No, DSCR loans are specifically for investment properties. “DSCR loans require borrowers to sign a certification of non-owner occupancy, which states they will not reside in the property,” says Fertig. “They must also sign an affidavit confirming the loan is for business purposes and not for a primary residence.”
Sources
- Joe DiSanto, founder and CEO at Play Louder, an educational platform for financial strategy coaching
- Ben Fertig, founder and president at Constructive Capital
About Caitlyn Fitzpatrick
Caitlyn Fitzpatrick has been a professional writer and editor since 2014 and entered the commerce journalism world in 2017. She’s passionate about helping readers make smart buying decisions by using data insights and interviewing experts. Most recently, Fitzpatrick was the Senior Shopping Editor at Trusted Media Brands, where she led affiliate content on Reader’s Digest. In addition to Benzinga, Fitzpatrick’s work can be found in a range of publications, including U.S. News & World Report’s 360 Reviews, Today’s Parent, Betches, WhatToWatch.com, PS (formerly Popsugar), and more.