DSCR Loans vs. Traditional Mortgages for Investment Properties

Which Path Should You Take to Financing Your Investment Property?

Real estate investing is becoming more popular than ever with borrowers getting more creative. The increase in investment property activity has also opened up new creative ways to finance and pay for these properties. For buyers looking to build or expand a rental portfolio, there are two common loan options: traditional mortgages and DSCR Loans. Both are designed to help you purchase investment properties, but they qualify you in very different ways. The right loan for you comes down to your strategy, your finances, and how you want to get to the closing table.

 

What Is a DSCR Loan?

A DSCR Loan is a type of mortgage built specifically for real estate investors. Instead of qualifying based on your personal income, it looks at the income potential of the property you’re buying. DSCR stands for Debt Service Coverage Ratio, which measures how well the property’s rental income covers the monthly mortgage payment.

This shift in focus from your W2s and tax returns to the property’s projected cash flow opens the door for a broader range of buyers. It’s especially useful for self-employed landlords, full-time investors, or anyone who’s already maxed out their Conventional Loan limit but still wants to scale their portfolio.

If the rent covers the payment (or comes close), you may not need to provide employment documentation, income statements, or traditional debt-to-income calculations. For many investors, that flexibility is the difference between hitting a wall and landing the next deal.

How DSCR Loans Work
For DSCR Loans, lenders focus on whether the rental income from the property can cover the monthly mortgage payment, including principal, interest, taxes, and insurance. But the details matter. Many lenders require a minimum DSCR between 0.75 and 1.25, meaning the property should generate at least 75% to 125% of the monthly debt payment in rental income. The exact threshold varies by lender and loan program, influencing everything from your down payment to interest rates.

Lenders often use market rent estimates — especially if the property isn’t currently leased — to calculate the DSCR. This means strong local rental comps can help you qualify even if the property is vacant or tenant turnover is expected.

Here’s a quick example:
If your monthly mortgage payment (including taxes and insurance) is $1,500, and the property rents for $1,800 per month, your DSCR is 1.2 ($1,800 ÷ $1,500). That’s a strong coverage ratio and typically meets or exceeds most lender requirements.

Who DSCR Loans Are Designed For
DSCR Loans are a great match for seasoned real estate investors who want the property’s income to carry the weight rather than their personal finances. They’re especially helpful in situations where traditional loans fall short or slow things down. If one or more of these categories apply to you, DSCR Loans could be a great option for you:

• Self-employed buyers, freelancers, or entrepreneurs who don’t have standard W2s or easy-to-document income
• Investors purchasing through LLCs or partnerships, including real estate syndications, who want to protect personal assets and structure deals flexibly
• Rental property buyers aiming to scale quickly, since there’s no limit on how many properties you can finance with DSCR Loans
• Short-term or long-term rental investors, from Airbnb hosts to traditional landlords. DSCR Loans can work for both, as long as there are strong rental comps
• Borrowers with lower credit scores or limited documentation, who still present a strong opportunity based on the property’s cash flow

 

Highlights of DSCR Loans

DSCR Loans come with a unique set of features that make them especially attractive to investors who want to move fast, think big, or sidestep the traditional loan grind.

Income & Approval Flexibility
With DSCR Loans, there is no personal income or employment verification required. Instead, approval is based on rental income. This streamlines the process, often leading to faster closings with less paperwork.

Portfolio & Property Growth
DSCR Loans offer no cap on financed properties, unlimited cash-out potential, and eligibility for a variety of property types and rental strategies, from single-family homes to multi-units and short-term rentals. This allows borrows to keep expanding their portfolios without restriction.

Investor-Friendly Structure
These loans can be taken out under an LLC, which provides liability protection and keeping properties off personal credit reports. Plus, some lenders allow for more flexible underwriting with lower credit scores or smaller down payments.

 

Traditional Loans for Income Properties

Not every investment property requires an outside-the-box solution. For many buyers, especially those with strong personal finances, a traditional mortgage can be just as effective and even easier to secure.

Conventional Loans follow familiar rules. If you’ve bought a primary residence before, the process will feel similar: lenders evaluate your income, credit, and debt-to-income ratio to determine whether you qualify. The biggest difference is that investment properties come with slightly stricter terms (like higher down payments and credit score minimums) but the structure remains the same.

For borrowers with steady W2 income, a solid financial profile, and minimal existing debt, conventional financing can offer a straightforward path to closing. Some investors even prefer Conventional Loans because of their predictability. Traditional financing is also a popular entry point for first-time investors and house hackers (buyers who plan to live in part of the property while renting out the rest). Loans like FHA, VA, or USDA allow for low down payments and flexible credit requirements when the property will be owner-occupied, making it easier to break into real estate investing.

How Conventional Financing Works
Conventional Loans are underwritten based on you, not the property. Lenders assess your personal income, assets, credit score, and debt-to-income ratio to determine how much risk you present as a borrower. If everything checks out, you’re approved.

For investment properties, the rules are a little stricter than for primary residences. Expect higher down payment requirements, a stronger credit profile, and potentially slightly higher interest rates. You’ll also need to demonstrate you can cover the mortgage and any other debts with your current income, without factoring in potential rental revenue.

When Does It Make Sense to Go Conventional?
If your goal is simplicity — and your personal finances are in good shape — a Conventional Loan may be the clearest path forward. This route works especially well for buyers who don’t need to rely on projected rent to qualify, whether that’s because they have steady income, minimal debt, or plan to hold the property before leasing it. Conventional Loans can also make more sense if you’re buying a property that won’t have cash flow immediately, like a fixer-upper or a home you plan to overhaul.

What about FHA and Other Loan Types for Income Properties?
If you are thinking about living in part of the property (even if it’s just a room in a large 4-bedroom home) you are what is referred to as a “house hacker”. House hackers take advantage of the low down payment options on loans such as FHA, VA & USDA to live in part of the property themselves and then rent the other rooms or units out for income. Although FHA Loans do require mortgage insurance, the low down payment requirements and flexible credit options make this program a dream come true for house hackers or investors looking to dip their toes in.

 

DSCR vs. Traditional Mortgage: Which One Is Right for You?

When it comes to financing rental properties, both Conventional and DSCR Loans can get the job done, but they take very different routes to get you there. The right fit depends on factors like how you want to qualify, how many properties you plan to own, and what kind of flexibility you need as an investor.

Qualification & Documentation Requirements
Conventional Loans assess your personal income, credit, debts, and require full documentation like tax returns and employment history. DSCR Loans, on the other hand, base approval on the property’s projected rental income, streamlining underwriting by focusing on lease agreements or rental comps instead of personal financial records.

Loan Limits & Portfolio Size
Conventional mortgages often limit the number of financed properties per borrower, typically around 10 to 15. DSCR Loans generally have no cap, making them attractive for investors looking to scale rapidly.

Flexibility with Income Types
DSCR Loans accommodate borrowers with non-traditional or irregular income, such as self-employed landlords or those with complex financial situations while Conventional Loans favor stable W2 income.

Property Type & Use
Both Conventional and DSCR Loans cover various investment property types, but DSCR Loans are often more accommodating to short-term rentals or unique rental scenarios, assuming rental income can be documented or projected.

Loan Terms & Cash-Out Options
DSCR Loans may offer more flexible cash-out refinance options, which can be a powerful tool for portfolio growth. Meanwhile, Conventional Loans typically have stricter refinance rules tied to borrower income and equity.

 

Talk to a Loan Expert Before You Invest

The right loan can make or break an investment deal — and figuring out which option fits your situation isn’t always black and white. That’s where we come in.

At Treadstone, our team knows the ins and outs of both DSCR and traditional financing. Whether you’re buying your first rental property or adding to a growing portfolio, we’ll help you explore the options and choose a loan that fits your strategy.

 

FAQs

How does a DSCR Loan work?
A DSCR Loan works by qualifying you based on the property’s ability to generate rental income rather than your personal income or employment history. Lenders calculate the Debt Service Coverage Ratio (DSCR) by dividing the property’s monthly rental income by its monthly debt payment. If the ratio meets the lender’s minimum requirement, you may be approved.

Is it hard to qualify for a DSCR Loan?
Qualifying for a DSCR Loan can be even simpler than a traditional mortgage if the property has strong rental income. Since you don’t need to provide income verification or employment documents, the focus stays on the property’s cash flow. If the numbers work, you’re more likely to get approved — even without perfect credit or a W2 job.

Is a DSCR Loan better than a Conventional Loan?
A DSCR Loan isn’t necessarily better or worse than a Conventional Loan — it just depends on your situation. If you want to qualify based on the property’s income rather than your own, a DSCR Loan offers more flexibility. But if you have strong personal finances, a Conventional Loan may be just as easy to qualify for and come with great terms. DSCR Loans often work for people who are turned down for other types of income property mortgages.

Are all DSCR Loans 20% down?
Not all DSCR Loans require exactly 20% down, but that’s a common benchmark. Some lenders may accept slightly less with strong property performance, while others may ask for more depending on your credit, experience, and the property’s DSCR. It’s best to talk with a lender to see what’s possible for your specific deal.