DSCR Loans: The Pros and Cons for Real Estate Investors

[Coty B Lunn]

Hey everyone,

DSCR loans (Debt Service Coverage Ratio loans) have been gaining a lot of attention lately and I wanted to share some thoughts and open up the discussion. These loans are based primarily on the property's ability to generate enough rental income to cover its debt, rather than on the borrower's personal income or debt-to-income ratio. That makes them very different from conventional financing.

Here is a breakdown of the pros and cons as I see them:

Pros of DSCR Loans

Property-based qualification
The loan is underwritten on the property's rental income compared to the monthly mortgage payment (PITI). If the DSCR ratio meets the lender's requirement (often 1.0–1.25+), you can qualify without traditional income verification.

No personal income checks
You do not need W2s, tax returns, or pay stubs. For self-employed investors or those with heavy write-offs, this can be a game changer.

Scalability
Because the loan focuses on the property and not your personal DTI, you can keep adding properties without hitting a personal income ceiling. This is especially useful for portfolio growth.

Flexibility in ownership
Many DSCR lenders allow loans in LLCs or business entities, which can make structuring your portfolio easier.

Attractive for STR operators
Short-term rental investors often use DSCR loans since high gross rental income helps qualify even if personal income is inconsistent.

Lower down payment options
Some lenders allow DSCR loans with as little as 15% down, making them more accessible for investors who want to conserve capital.

Closing costs covered
You can often roll in up to 6% toward closing costs into the loan, which reduces upfront cash needed at the table.

Cons of DSCR Loans

Higher rates and fees
Rates are usually one to two percentage points higher than conventional loans, and fees can also be steeper.

Reserve requirements
Lenders often want six to twelve months of reserves, which can tie up a lot of capital.

Credit still matters
While DTI is not considered, credit score usually still plays a role. Minimums can range from 620–680+, and better credit usually gets better pricing.

Prepayment penalties
Many DSCR loans come with penalties if you refinance or sell within the first few years. That can limit exit flexibility.

Documentation still needed
They are not truly “no-doc” loans. Lenders still want leases or market rent estimates, appraisals with rent schedules, and proof of reserves.

Final Thoughts

It is easy to see why DSCR loans have become so popular. They give investors a way to keep scaling when conventional financing is not an option. At the same time, they do come with trade-offs like higher rates and prepayment restrictions.

Who here has closed a DSCR loan recently? How did your experience compare with conventional financing? Would you recommend your lender?

[Cameron Jones]

Thanks for sharing @Coty B Lunn, I wasn't aware that many come with bad refinance/exit penalties. A lot of lenders usually advertise DSCR loans as entry level for a fix and flip, and are interest only for 5 years, and then get out via a refi before they balloon. Do most of the exit penalties outweigh the benefits of exiting?