Top 10 Mistakes Investors Make with DSCR Loans (And How to Avoid Them)

DSCR loans have become a game-changing financing strategy for real estate investors. With no W-2s or tax returns required, and the ability to qualify based on rental income, they offer incredible flexibility. But with that flexibility comes risk—especially if you’re new to the product or scaling fast.

If you’re planning to use a DSCR loan to finance your next investment, avoid these 10 common mistakes that can derail your deal or stall your portfolio growth.

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1. Overleveraging the Property

Many investors get excited about the high LTVs (up to 80%) that some DSCR lenders offer. But maxing out leverage leaves no room for error.

Avoid it by:

• Keeping LTV at or below 75% where possible.
• Maintaining 6–12 months of reserves.
• Stress-testing your cash flow with conservative vacancy and expense estimates:contentReference[oaicite:0]{index=0}.

2. Focusing Only on Rate Instead of Terms

DSCR loan rates are typically higher than conventional loans—but that’s not the full picture. Ignoring prepayment penalties, interest-only options, or loan term flexibility can cost you more in the long run.

Avoid it by:

• Asking about prepay penalties (3- or 5-year step-downs are common):contentReference[oaicite:1]{index=1}.
• Comparing IO vs. amortizing terms based on your cash flow goals.
• Matching loan structure to your hold period.

3. Misunderstanding the DSCR Calculation

The Debt Service Coverage Ratio = Net Operating Income ÷ Debt Service. But many investors don’t realize lenders often use lower of actual rent or appraised market rent in their calculations:contentReference[oaicite:2]{index=2}.

Avoid it by:

• Reviewing your appraisal’s Form 1007 rent survey in detail.
• Using a DSCR loan calculator before applying.

4. Assuming Short-Term Rental Income Always Counts

Some DSCR lenders accept Airbnb or VRBO income—but not all. And many require 12 months of proven income or use adjusted projections with vacancy factors:contentReference[oaicite:3]{index=3}.

Avoid it by:

• Choosing lenders who accept STR underwriting (e.g., using AirDNA).
• Having backup comps or a property manager’s letter ready.

Learn more in our guide to DSCR Loans for Short-Term Rentals.

5. Skipping the LLC Setup (When You Shouldn’t)

DSCR loans are typically business-purpose loans and can be closed in an LLC—ideal for asset protection and scalability.

Avoid it by:

• Setting up your LLC early, with all paperwork ready (Articles, EIN, Operating Agreement).
• Ensuring your lender allows entity vesting without requiring a personal DTI.

Need help? Read: Financing Investment Properties with DSCR Loans in an LLC

6. Failing to Budget for Closing Costs and Fees

DSCR loans often come with 1–2% origination points, appraisal fees (including rent survey), and sometimes prepayment penalty costs.

Avoid it by:

• Getting a Loan Estimate upfront.
• Comparing total cost—not just the rate.

7. Not Planning for Reserve Requirements

Even though there’s no income verification, lenders still require proof of reserves—often 6 months of PITIA.

Avoid it by:

• Keeping liquid funds in accounts you can document.
• Avoiding large unexplained deposits or transfers before closing.

8. Assuming All DSCR Lenders Have the Same Guidelines

Some lenders accept lower DSCR (as low as 0.75), others demand 1.25+. Some allow first-time investors; others don’t.

Avoid it by:

• Shopping lenders or working with a broker who understands investor financing.
• Reading up on How to Qualify for a DSCR Loan Without Traditional Income.

9. Using the Wrong Exit Strategy for BRRRR Deals

DSCR loans are often used in BRRRR—but many lenders require seasoning before refinancing. Others allow “delayed finance” refis or accept new appraised value without a 6-month hold.

Avoid it by:

• Confirming your lender’s seasoning requirement in advance.
• Structuring your bridge loan exit into a DSCR refinance intentionally.

Explore: The BRRRR-Friendly Guide to DSCR Refinancing

10. Applying Without a Clear Strategy

Many investors rush into a DSCR loan without a clear investment plan or backup documentation, causing delays or denials.

Avoid it by:

• Preparing a basic deal summary, rental comps, and credit profile.
• Consulting with a financing advisor before making offers.

Need help choosing the right loan? Get matched with an expert who specializes in your investing strategy.

Frequently Asked Questions

What credit score do I need for a DSCR loan?
Most lenders require 640+, with better terms at 700+:contentReference[oaicite:4]{index=4}.

Can I get a DSCR loan as a first-time investor?
Yes, many lenders allow it if you have the required credit and down payment. Some may require more reserves:contentReference[oaicite:5]{index=5}.

What’s the typical DSCR ratio required to qualify?
1.20x is common, though some allow breakeven (1.0x) or even lower with rate adjustments.

Do DSCR loans work for short-term rentals?
Yes—if you choose a lender that underwrites STR income and you’re prepared to show historical data or AirDNA estimates:contentReference[oaicite:6]{index=6}.

Read Next

• Complete Guide to DSCR Loan Requirements
• DSCR Loans vs Conventional Mortgages
• How to Use a HELOC to Scale Your Rental Portfolio Fast

Ready to move forward with financing that aligns with your strategy?

Get started today and see how the right DSCR lender can help you scale faster with less stress.