When it comes to financing investment properties, real estate investors have more options than ever. Two of the most popular loan types are DSCR loans and traditional mortgages. Each comes with unique advantages, limitations, and ideal use cases. Choosing the right one depends on your financial profile, the type of property you’re purchasing, and your long-term investing goals.
In this guide, we’ll compare DSCR loans vs. traditional mortgages—breaking down how they work, who they’re for, and how to decide which is the better fit for your real estate investment strategy.
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A DSCR loan (Debt Service Coverage Ratio loan) is a type of non-QM (non-qualified mortgage) designed specifically for real estate investors. These loans are underwritten based on the cash flow of the property, not the borrower’s personal income.
DSCR = Net Operating Income (NOI) / Annual Debt Service
For example, if a rental property produces $60,000 in annual net income and the loan requires $48,000 in annual payments:
DSCR = $60,000 ÷ $48,000 = 1.25
Most lenders require a DSCR of 1.20 to 1.25 for approval.
A traditional mortgage—also known as a conventional loan—is typically backed by Fannie Mae or Freddie Mac and is underwritten based on the borrower’s personal financial profile. Lenders review:
Traditional mortgages often have stricter guidelines but come with lower interest rates and longer amortization periods.
| Feature | DSCR Loan | Traditional Mortgage |
|---|---|---|
| Approval Basis | Property cash flow (DSCR) | Personal income and DTI |
| Income Documentation Required | None | Yes (W-2s, tax returns, pay stubs) |
| Ideal For | Self-employed, LLC investors, STR operators | Salaried borrowers with strong income |
| Credit Score Requirement | 660+ (varies by lender) | 620+ (typically) |
| Property Use | Investment only (non-owner occupied) | Primary, secondary, and investment |
| Ownership Structure | LLC, LP, Corporation, Individual | Primarily individual ownership |
| Loan Limits | No limit on number of properties | Limits may apply based on loan count and DTI |
| Closing Timeline | 2–4 weeks | 3–6 weeks |
| Loan Types | Fixed, ARM, Interest-only options | Fixed and ARM |
| Rates | Higher than traditional mortgages | Typically lower |
| Down Payment | 20–25% typical | 15–20% for investment properties |
| Prepayment Penalty | Common (3–5 years) | Rare or none |
DSCR loans are ideal for investors who:
Traditional mortgages are best suited for borrowers who:
Why? The investor’s tax returns don’t reflect high income, but the property’s projected cash flow supports the loan.
Why? The investor qualifies easily with personal income, and the property can be held in their name at a lower interest rate.
Pros:
Cons:
Pros:
Cons:
Both DSCR loans and traditional mortgages have their place in a smart real estate investment strategy. For self-employed investors, short-term rental operators, or those using LLCs, DSCR loans offer unmatched flexibility and simplicity. For first-time investors or W-2 employees, traditional mortgages may offer better rates and easier access.
The best choice depends on your investment goals, income profile, and how you plan to structure your portfolio.
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Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
