Conventional vs. DSCR Loans - How Do They Compare For Investment Property Financing

[Brad Roche]

When it comes to securing financing for an investment property, Conventional loans and DSCR (Debt Service Coverage Ratio) loans emerge as two top choices. Conventional loans are the standard go-to option for investment financing, but how do DSCR Loans measure up? The DSCR ratio is = Gross Monthly Rent / Monthly Mortgage Payment. In simple terms- I like to think of DSCR as... Does your monthly rent "cover" your monthly mortgage (debt)- Check out below to see how conventional and DSCR loans stack up against each other!

Credit Requirements

• DSCR
  • - 620 Minimum Credit Score
• Conventional
  • - 620 Minimum Credit Score
    

Down Payment Requirements

• DSCR **Under $1 Million Loan Amount
  • - DSCR Ratio > = 1.0
    • - 700+ Credit Score = 20% Down
    •  - 620-699 Credit Score = 25% Down
  • - DSCR Ratio = .99 - .75
  •         - 700+ Credit Score = 25% Down
    •   - 660-699 Credit Score = 30% Down
• Conventional 
  • - 620+ Credit Score = 20% Down
    

Income Requirements      

        DSCR

        -  Does not look at Income whatsoever

• Conventional
•    - Debt-to-Income Ratio must be 45% and below

Using Rental Income to Qualify

• DSCR
  • - DSCR loans account heavily for the DSCR Ratio (= Projected Rent / Gross Monthly Mortgage Payment)
  •             -We look for the ratio to be 1.0 + to receive the best rates and term (a.k.a we look for the monthly rent to completely cover the mortgage payment or more)
  • - If the DSCR ratio is between .75-.99 (a.k.a the rent does not fully cover the mortgage payment)- you are still eligible for DSCR but expect to receive a higher rate and worse terms compared to having a ratio 1.0+
    
    •         - Example: Borrower’s monthly mortgage payment will be $2,000. After the appraisal was complete- the appraiser said the projected rental income is $2,200. DSCR Ratio = 2,200 / 2,000 = 1.1
      • - If the projected rent came back at $1,800 (= 1,800 / 2,000 = .9) You would still be eligible for DSCR but you will receive worse rate and terms.

      Conventional

        - You can use 75% of the projected rental income toward qualifying for the mortgage

Prepayment Penalty

• DSCR
  • - Most will be anywhere from No Prepayment Penalty to 5 Years.
    • - The higher the prepayment penalty…the better rate / terms you will receive
    •     - Penalty is generally 5% of the loan amount if you pre-pay
• Conventional
  • - No Prepayment Penalty

Who is an Ideal Borrower?

• DSCR
  • - Self-Employed, Business owners, Real Estate Investors ( if you write off a lot of your income as expenses)
• Conventional
  • - W2, 1099 (Who don't write off their income), salary, hourly workers.

Overall: If you meet the qualifications, a Conventional loan is the most favorable choice. It offers the most attractive rates and terms for investment property loans. On the other hand, DSCR loans come with higher interest rates and fees, but they serve as a viable alternative if you don't meet the requirements for a Conventional loan.