DSCR Loan vs Conventional Loan: Differences & Benefits

Are you trying to finance a rental property but unsure which option is best for you? Understanding the differences in a DSCR Loan vs Conventional Loan can help you make the right choice for your investment goals.

DSCR loans qualify borrowers based on a property’s cash flow, making them ideal for investors without traditional income verification. Conventional loans, on the other hand, require personal income proof and are commonly used for primary residences and investment properties.

By the end of this guide, you will know which loan best suits your financial situation and investment goals.

Key Takeaways

DSCR loans qualify borrowers based on property cash flow, making them ideal for real estate investors and self-employed individuals.

Conventional loans require personal income verification and are best for homebuyers and investors with stable earnings.

DSCR loans have higher down payment requirements (20-30%) and interest rates, while conventional allow lower down payments (as low as 3-5%) with better refinancing options.

DSCR loans are best for scaling a rental portfolio, whereas conventional loans are suited for long-term homeownership and lower borrowing costs.

What is a DSCR Loan?

A Debt-Service Coverage Ratio (DSCR) loan is a type of real estate financing that qualifies borrowers based on a property’s income potential rather than their personal income. 

Instead of using W-2s or tax returns, lenders assess whether the property's rental income can cover the mortgage and expenses.

Who It’s Best For?

• Real estate investors looking to finance rental properties without traditional income verification.
• Self-employed individuals or those with non-traditional income sources who may not qualify for conventional loans.
• Investors expanding their portfolios who prefer a cash flow-based loan over personal financial documentation.

What Is a Debt Service Coverage Ratio (DSCR)?

Debt Service Coverage Ratio (DSCR) is a key metric lenders use to determine whether a property generates enough income to cover its debt payments. It measures the property’s ability to pay its mortgage based on its cash flow.

The formula is: 

• A DSCR of 1.25x means the property generates 25% more income than needed to cover mortgage payments.
• A DSCR below 1.0x means the property does not generate enough income to cover its debt.

For Example 

An investor owns a rental property with:

• Net Operating Income (NOI): $5,000 per month
• Monthly Mortgage Payment: $4,000

DSCR = 5,000 / 4,000​ = 1.25x

Since the DSCR is above 1.0, lenders see this as a low-risk investment, making it easier to qualify for financing.

Benefits of DSCR Loans

No personal income verification.

Faster Approval process.

Easier Approval for real estate investors.

Works for multiple investment properties.

For further explanation, read our infographic below: 

Drawbacks of DSCR Loans

Higher interest rates: Because DSCR are considered higher risk by lenders, they come with higher interest rates compared to conventional mortgages. Investors should evaluate whether the rental income offsets the higher borrowing costs.

Stricter rental income requirements: Most lenders require a minimum DSCR ratio of 1.25x. If the rental income is too low, investors may need to make a larger down payment to meet the ratio.

Not for primary residences: DSCR loans are exclusively designed for investment properties, meaning homebuyers looking for a primary residence must apply for a conventional loan or another traditional mortgage option.

DSCR Loan Requirements

Lenders evaluate DSCR loans based on a property’s ability to generate enough rental income to cover its mortgage. 

While requirements may vary, most lenders look for the following:

1. DSCR Ratio

Typically, 1.25x or higher. However, some lenders may allow lower DSCRs but with higher interest rates.

2. Down Payment

Usually, 20%–25% of the property’s purchase price. A lower DSCR may require a larger down payment.

3. Loan-to-Value (LTV) Ratio

Most lenders offer LTVs of 75%–80%, meaning they finance up to 80% of the property’s value.

4. Credit Score

While DSCR loans don’t rely on personal income, lenders still check credit scores, typically requiring 620+, with better terms for higher scores.

5. Lender Variations

• Some lenders accept DSCR as low as 1.0x but at higher interest rates or with larger down payments.
• Others may allow projected rental income instead of proven rental history.

What Is a Conventional Loan?

A conventional loan is a traditional mortgage offered by banks, credit unions, and private lenders. Conventional loans are based on the borrower’s income, credit score, and overall financial history rather than the property’s cash flow. 

These loans are commonly used for primary residences, second homes, and investment properties.

Who is It Best For?

• Homebuyers looking to purchase a primary residence.
• Borrowers with stable income who can provide W-2s, tax returns, and pay stubs to verify earnings.
• Investors with strong credit scores who qualify for lower interest rates and better loan terms.

Benefits of Conventional Loans

Lower interest rates: Conventional loans typically offer lower rates since they follow traditional underwriting guidelines and are considered lower risk by lenders.

More flexible loan terms: You can choose between fixed-rate and adjustable-rate mortgages (ARMs), giving them more control over their monthly payments and long-term costs.

Easier refinancing options: Conventional loans usually have lower refinancing fees and more opportunities to restructure them for better terms or lower interest rates.

Lower down payment options: Depending on the lender and borrower qualifications, conventional loans may allow down payments as low as 3%–5% for primary residences and 15%–20% for investment properties.

Drawbacks of Conventional Loans

Strict income verification: Lenders require W-2s, tax returns, and pay stubs to assess a borrower’s ability to repay, which can be a barrier for self-employed individuals or those with variable income.

Harder for self-employed borrowers: Without consistent, documented income, self-employed borrowers may need higher credit scores, larger down payments, or additional cash reserves to qualify.

Limited options for real estate investors: Many conventional lenders cap the number of financed properties an investor can hold, making it challenging to scale a rental portfolio.

Private Mortgage Insurance (PMI) for low down payments: If a borrower puts less than 20% down on a primary residence, they may be required to pay PMI.

DSCR Loans Vs Conventional Loans: Differences

Here is a side-by-side comparison to highlight the differences between DSCR loans and conventional loans: 

DSCR vs. Conventional Loan: Which Is Better for You?

The right loan depends on your financial situation, investment strategy, and long-term goals.

Here’s a simple breakdown to help you decide:

Best for Real Estate Investors

A DSCR loan is the better choice if you’re buying a rental property and want to qualify based on its cash flow rather than your personal income. 

This is especially useful for self-employed investors or those with multiple properties who may not meet traditional income requirements.

Best for Homebuyers

A conventional loan is ideal if you have a stable job, strong credit, and can verify your income through W-2s or tax returns. 

This option typically has lower interest rates and lower down payment requirements, making it ideal for primary residences or long-term investments.

When to Choose DSCR Over Conventional

If you’re investing in income-generating properties and want an easier approval process with less paperwork, a DSCR loan is the way to go. It allows you to scale your real estate portfolio faster without the strict financial documentation required by traditional lenders.

Find the Right Loan for Your Needs

Choosing between a DSCR loan and a conventional loan depends on your financial situation and investment plans. If you're unsure which loan is best for you, speaking with a mortgage broker or lender can help you explore your options, compare rates, and understand qualification requirements.

• Ask about interest rates, down payments, and loan terms to see what fits your budget.
• Discuss your investment goals. Whether you're buying a rental property or a primary home, different loans offer unique advantages.
• Consider future refinancing options if you plan to transition from a hard money or DSCR loan to a conventional mortgage.

We can help you compare DSCR and conventional loan rates today and find the best financing option for your real estate goals. Contact Truss Financial Group to get started.