DSCR vs Conventional Loans: What Real Estate Investors Should Know

When it comes to financing rental properties, real estate investors have more options than ever. Two of the most common—and most misunderstood—choices are DSCR loans and conventional loans.

While conventional mortgages have long been the go-to for primary residences and small-scale investors, DSCR (Debt Service Coverage Ratio) loans are rapidly becoming the tool of choice for investors focused on cash flow and portfolio growth.

So which is better? That depends on your goals, your income profile, and the type of properties you’re investing in. This guide breaks down the differences—so you can choose the best path for your next deal.

What Is a DSCR Loan?

A DSCR loan is a type of non-QM (non-qualified mortgage) loan designed specifically for real estate investors. Instead of requiring W-2s, pay stubs, or tax returns, DSCR loans use the property’s income to qualify.

DSCR Formula:
DSCR = Net Operating Income (NOI) ÷ Annual Debt Service

If your rental earns $48,000/year in NOI and your mortgage costs $36,000/year, your DSCR is 1.33. Most lenders require a minimum DSCR of 1.20 to 1.25 to approve the loan.

What Is a Conventional Loan?

A conventional loan is a conforming mortgage backed by Fannie Mae or Freddie Mac. It’s typically used by homeowners—but can also be used by investors purchasing 1–4 unit residential properties in their personal name.

To qualify, you’ll need to meet strict criteria, including:

• W-2 or tax return income verification
  
• Debt-to-income ratio (DTI) below 43–45%
  
• Minimum credit score of 620 (higher for investors)
  
• Limited number of financed properties (usually 10 max)
  

DSCR vs Conventional Loans: Key Differences

When to Use a DSCR Loan

Choose a DSCR loan if you:

• Are self-employed or don’t want to provide income docs
  
• Want to buy under an LLC or business entity
  
• Plan to invest in short-term rentals (Airbnb, Vrbo)
  
• Need to scale past 10 properties
  
• Are focused on cash flow and fast closings
  

Because DSCR loans look only at property performance, they’re ideal for BRRRR strategies, portfolio growth, and out-of-state investing.

When to Use a Conventional Loan

Go with a conventional loan if you:

• Are buying your first or second investment property
  
• Have strong W-2 income and a low DTI ratio
  
• Want a lower interest rate
  
• Plan to house hack or live in one unit of a multifamily
  
• Are purchasing long-term rentals in your personal name
  

Conventional loans tend to offer better rates and lower costs—but they come with stricter qualification standards and less flexibility.

Cost Comparison: DSCR vs Conventional

Note: Rates vary by credit score, property type, loan size, and market. Always compare both options before choosing.

Financing Strategy Tip: Combine Both

Many seasoned investors start with conventional loans to lock in lower rates on their first few properties—then switch to DSCR loans as they scale and shift into LLC ownership or STR investing.

Example:

1. Buy your first duplex conventionally.
   
2. Use a HELOC or DSCR cash-out to buy #2.
   
3. Finance Airbnb #3 through a DSCR lender using STR income.
   
4. Continue scaling without worrying about your DTI or W-2.
   

Final Thoughts

Both DSCR and conventional loans offer valuable paths to real estate wealth. The key is understanding your financing profile and investment goals.

If you want simplicity, flexibility, and speed, DSCR loans are the best bet.
If you have strong personal income and are early in your investing journey, conventional financing can help you lock in great terms.

Either way, the best loan is the one that supports your strategy—not just your rate.