DSCR Loans vs. Second Home (“10% Down”) Loans

[Robin Simon]

Feature / Factor	DSCR Loans	Second Home (“10% Down”) Loans
Purpose & Intended Use	Strictly business-purpose loans for income-producing investment properties. Owner occupancy prohibited.	Intended for dual-use, personal use with occasional rental income. Must be “primarily” a second home for the borrower’s personal enjoyment.
Rental Day Limits	No restrictions on the number of rental days per year.	Typically limited to ≤ 180 days per year rented out (must be majority owner-occupied). Exceeding this can violate loan terms.
Property Management Rules	Can use third-party or professional property managers, co-hosts, or management companies.	Must be self-managed by the borrower. Third-party property management not permitted under Fannie Mae/Freddie Mac second-home policy.
Eligible Property Types	1–4 unit residential properties (SFRs, duplexes, triplexes, fourplexes) typically always allowed for STR usage by DSCR Lenders.	Single-family homes only. 2–4 unit properties ineligible.
Ownership Structure	Borrower may take title in an LLC, corporation, or trust that can include multiple owners. Loan made to the entity (with personal guarantee) and typically will not show up on individual owner’s credit.	Must be in the borrower’s personal name. LLC or entity vesting not allowed. Almost impossible to split ownership (outside of married spouses) and debt is reported to personal credit.
Down Payment / Leverage	Commonly 20–25% down (75.0–80.0% LTV), sometimes higher for STRs.	Minimum 10% down (90% LTV) allowed, but requires Private Mortgage Insurance (PMI) until ≤ 80.0% LTV.
Private Mortgage Insurance (PMI)	Not required.	Required when LTV > 80.0%; adds roughly 0.3% – 1.0% annual cost (≈ $100–$250 per $400k loan per month).
Geographic Restrictions	None beyond lender state eligibility and zoning compliance.	Must be far enough from borrower’s primary residence to be a “second home,” but close enough for “reasonable personal use.” Both too close and too far can be disqualifying.
Income Qualification	Use of a DSCR Ratio for qualification, many lenders can count projected STR income to qualify.	Use of a DTI Ratio for qualification, property considered more of an expense (hindrance) than positive since it uses conservative rental projections and assumes less than half the year rented.
Scalability for Investors	Designed for scaling portfolios, generally no cap on number of financed properties.	Capped under conventional loan rules (max 10 financed properties per borrower).