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User Stats

10
Posts
2
Votes
Ruth Schrader-Grace
  • Real Estate Agent
2
Votes |
10
Posts

What is better when it comes to a loan for STR, MTR, 2nd home/vacation home?

Ruth Schrader-Grace
  • Real Estate Agent
Posted

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios? 

User Stats

1,368
Posts
857
Votes
Jay Hurst
Lender
#2 Private Lending & Conventional Mortgage Advice Contributor
  • Lender
  • Dallas, TX
857
Votes |
1,368
Posts
Jay Hurst
Lender
#2 Private Lending & Conventional Mortgage Advice Contributor
  • Lender
  • Dallas, TX
Replied
Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios? 

Because conventional is the best product IF you can qualify and/or eligible for it in all cases. so, that should always be the first look. If you cannot qualify or not eligible (if you already have 10 properties financed) then you look at other options like DSCR or other alternatives like non-QM options.

User Stats

34
Posts
10
Votes
Stacy Patel
  • Lender
  • Florida
10
Votes |
34
Posts
Stacy Patel
  • Lender
  • Florida
Replied

Hi Ruth,

For STR (Short-Term Rental), MTR (Mid-Term Rental), and second/vacation homes, DSCR Loans (Debt Service Coverage Ratio) are often the best option. These loans focus on the property's income potential rather than the borrower's personal income, making them ideal for investment properties. They offer flexibility and are specifically designed for rental properties.

Best, Stacy

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User Stats

1,368
Posts
857
Votes
Jay Hurst
Lender
#2 Private Lending & Conventional Mortgage Advice Contributor
  • Lender
  • Dallas, TX
857
Votes |
1,368
Posts
Jay Hurst
Lender
#2 Private Lending & Conventional Mortgage Advice Contributor
  • Lender
  • Dallas, TX
Replied
Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios? 


I would add you should only do business with a lender who can BOTH. if the LO does not understand how DSCR loans work then then they would likely not be a good fit. But, if they are not licensed (they will have a NMLS number and have to show it on correspondence) they they can ONLY do DSCR loans. You want the best product for YOU, not the product your LO can actually do.

User Stats

3,492
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1,076
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Erik Estrada
Lender
  • Lender
1,076
Votes |
3,492
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Erik Estrada
Lender
  • Lender
Replied

Hey Ruth, 

What are you in search for? As Jay mentioned above, conventional financing is technically the best product if you qualify for it. 

You can look into DSCR financing, however there will be prepayment penalties and they generally have higher fees. Rate wise, you could get more favorable rates going DSCR than on a conventional loan in some instances. I think the main drawback is being on a Prepayment Penalty in a rate decreasing environment. You could buy it out or increase the rate to reduce the years, but it will result in a much more costlier loan.

User Stats

4,176
Posts
4,148
Votes
Robin Simon
Pro Member
#1 Private Lending & Conventional Mortgage Advice Contributor
  • Lender
  • Austin, TX
4,148
Votes |
4,176
Posts
Robin Simon
Pro Member
#1 Private Lending & Conventional Mortgage Advice Contributor
  • Lender
  • Austin, TX
Replied
Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios? 


 Sharing an article published just last year on BP on this exact question:

Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/short-term-rental-loans-a...


High Level -

-Conventional will typically offer lowest rates/fees but harder to qualify, especially if you are scaling and past the first couple of properties or going for the high-end of the market

-2nd Home (10% Down) - should be very careful here - these are not intended for STR properties and people using them for pure investment properties are entering dangerous territory (you are attesting to use it as a rental half the year or less, no management, need to live in proximity, etc.)

- DSCR Loans - typically your best bet if you don't quality (or have "outgrown") conventional or looking to scale a portfolio or diving into more specialized markets. Note - DSCR lenders can vary quite a bit when it comes to their underwriting/qualification/overall friendliness towards STRs so make sure you are aware of the differences

User Stats

2,879
Posts
2,980
Votes
Corby Goade
Property Manager
Agent
  • Investor
  • Boise, ID
2,980
Votes |
2,879
Posts
Corby Goade
Property Manager
Agent
  • Investor
  • Boise, ID
Replied

There isn't a "best" option. There are different products for different buyer situations. Conventional is always going to be the cheapest, but sometimes it doesn't work due to a buyer's financial situation or their desire to keep a property out of their personal name. 

User Stats

10
Posts
2
Votes
Ruth Schrader-Grace
  • Real Estate Agent
2
Votes |
10
Posts
Ruth Schrader-Grace
  • Real Estate Agent
Replied
Quote from @Jay Hurst:
Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios? 

Because conventional is the best product IF you can qualify and/or eligible for it in all cases. so, that should always be the first look. If you cannot qualify or not eligible (if you already have 10 properties financed) then you look at other options like DSCR or other alternatives like non-QM options.


User Stats

10
Posts
2
Votes
Ruth Schrader-Grace
  • Real Estate Agent
2
Votes |
10
Posts
Ruth Schrader-Grace
  • Real Estate Agent
Replied

Thank you. I can qualify but looking at all options to see what is best. 

User Stats

1,368
Posts
857
Votes
Jay Hurst
Lender
#2 Private Lending & Conventional Mortgage Advice Contributor
  • Lender
  • Dallas, TX
857
Votes |
1,368
Posts
Jay Hurst
Lender
#2 Private Lending & Conventional Mortgage Advice Contributor
  • Lender
  • Dallas, TX
Replied
Quote from @Ruth Schrader-Grace:

Thank you. I can qualify but looking at all options to see what is best. 


 In that case, and you are willing to provide the required income info, when you look at the TRUE cost of a loan (rate, up front costs and pre-payment penalty, not just rate) conventional will be the best option every time. 

User Stats

10
Posts
2
Votes
Ruth Schrader-Grace
  • Real Estate Agent
2
Votes |
10
Posts
Ruth Schrader-Grace
  • Real Estate Agent
Replied
Quote from @Stacy Patel:

Hi Ruth,

For STR (Short-Term Rental), MTR (Mid-Term Rental), and second/vacation homes, DSCR Loans (Debt Service Coverage Ratio) are often the best option. These loans focus on the property's income potential rather than the borrower's personal income, making them ideal for investment properties. They offer flexibility and are specifically designed for rental properties.

Best, Stacy


 The only thing I'm concerned about is the prepayment penalties with rates coming down. Not sure getting locked into 1-3 years is the best choice. 

User Stats

10
Posts
2
Votes
Ruth Schrader-Grace
  • Real Estate Agent
2
Votes |
10
Posts
Ruth Schrader-Grace
  • Real Estate Agent
Replied
Quote from @Erik Estrada:

Hey Ruth, 

What are you in search for? As Jay mentioned above, conventional financing is technically the best product if you qualify for it. 

You can look into DSCR financing, however there will be prepayment penalties and they generally have higher fees. Rate wise, you could get more favorable rates going DSCR than on a conventional loan in some instances. I think the main drawback is being on a Prepayment Penalty in a rate decreasing environment. You could buy it out or increase the rate to reduce the years, but it will result in a much more costlier loan.

I agree and have the same concern. And if closing costs are more as well than not sure if DSCR loan is appropriate.

User Stats

10
Posts
2
Votes
Ruth Schrader-Grace
  • Real Estate Agent
2
Votes |
10
Posts
Ruth Schrader-Grace
  • Real Estate Agent
Replied
Quote from @Jay Hurst:
Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios? 


I would add you should only do business with a lender who can BOTH. if the LO does not understand how DSCR loans work then then they would likely not be a good fit. But, if they are not licensed (they will have a NMLS number and have to show it on correspondence) they they can ONLY do DSCR loans. You want the best product for YOU, not the product your LO can actually do.


 I definitely agree with that.

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User Stats

10
Posts
2
Votes
Ruth Schrader-Grace
  • Real Estate Agent
2
Votes |
10
Posts
Ruth Schrader-Grace
  • Real Estate Agent
Replied
Quote from @Jay Hurst:
Quote from @Ruth Schrader-Grace:

Thank you. I can qualify but looking at all options to see what is best. 


 In that case, and you are willing to provide the required income info, when you look at the TRUE cost of a loan (rate, up front costs and pre-payment penalty, not just rate) conventional will be the best option every time. 


 Correct although I do despise all that paperwork but we're talking money here so...

User Stats

10
Posts
2
Votes
Ruth Schrader-Grace
  • Real Estate Agent
2
Votes |
10
Posts
Ruth Schrader-Grace
  • Real Estate Agent
Replied
Quote from @Robin Simon:
Quote from @Ruth Schrader-Grace:

It's easy to go with conventional as most are versed in that product yet there are so many other options out there. It seems the few lenders I've spoken with all want to direct to conventional vs anything else. Is it because of their commissions, the risks or what? And what type of loan product have you found to be the best for the above scenarios? 


 Sharing an article published just last year on BP on this exact question:

Short-Term Rental Loans: What Are the Options and How Do DSCR Loans Stack Up?

https://www.biggerpockets.com/blog/short-term-rental-loans-a...


High Level -

-Conventional will typically offer lowest rates/fees but harder to qualify, especially if you are scaling and past the first couple of properties or going for the high-end of the market

-2nd Home (10% Down) - should be very careful here - these are not intended for STR properties and people using them for pure investment properties are entering dangerous territory (you are attesting to use it as a rental half the year or less, no management, need to live in proximity, etc.)

- DSCR Loans - typically your best bet if you don't quality (or have "outgrown") conventional or looking to scale a portfolio or diving into more specialized markets. Note - DSCR lenders can vary quite a bit when it comes to their underwriting/qualification/overall friendliness towards STRs so make sure you are aware of the differences


 Yes, thank you. There are rules to abide by. 

User Stats

10
Posts
2
Votes
Ruth Schrader-Grace
  • Real Estate Agent
2
Votes |
10
Posts
Ruth Schrader-Grace
  • Real Estate Agent
Replied
Quote from @Jay Hurst:
Quote from @Ruth Schrader-Grace:

Thank you. I can qualify but looking at all options to see what is best. 


 In that case, and you are willing to provide the required income info, when you look at the TRUE cost of a loan (rate, up front costs and pre-payment penalty, not just rate) conventional will be the best option every time. 

Thank you. It is something to consider. 

User Stats

35
Posts
2
Votes
Kent Kettell
  • Catlett, VA
2
Votes |
35
Posts
Kent Kettell
  • Catlett, VA
Replied

I agree, DSCR is the best option because it is flexible, but you can always work with someone who can evaluate your situation to find the best option FOR YOU.