7 DSCR Loan Mistakes That Kill Your Approval

Avoid these 7 critical mistakes that cause DSCR loan denials. Learn what experienced investors do differently to get approved faster with better terms.

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7 DSCR Loan Mistakes That Kill Your Approval

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DSCR loans are one of the most accessible financing tools for real estate investors. No tax returns, no income verification, no employment history. Just a property that generates enough rental income to cover its debt. Simple, right?

Not if you make the wrong moves. Every year, thousands of investors get denied, get stuck with terrible terms, or lock themselves into loans they regret. The mistakes are almost always preventable, and they follow predictable patterns.

Here are the seven most common mistakes that kill DSCR loan approvals and how to avoid every single one. If you’re still early in your research, start with our complete guide to DSCR Loan Financing for the fundamentals.

Mistake 1: Overestimating Rental Income

This is the number one reason DSCR loan applications fall apart. The property’s rental income is the entire foundation of a DSCR loan, and if you overestimate what a property will actually rent for, the math collapses.

Run your numbers through our DSCR Loan Calculator — Canadian Edition to see if your property qualifies.

What Goes Wrong

You find a property listed at $275,000. The seller or listing agent claims it rents for $2,400 per month. You run the numbers: at $2,400 per month with a mortgage payment of $1,900, your DSCR ratio is 1.26. Looks great. You apply for the loan.

Then the appraiser does a market rent analysis and determines the realistic market rent is $2,050 per month. Your DSCR ratio drops to 1.08, which might still squeak by with some lenders. But if the appraiser comes back at $1,850, your DSCR is 0.97 and you’re below the minimum 1.0 threshold. The loan gets denied. This is true whether you’re buying office buildings, retail property investments, or single-family rentals.

The Real Scenario

An investor in Jacksonville, Florida found a duplex listed at $320,000. Each unit was advertised at $1,400 per month ($2,800 total). The DSCR math worked beautifully on paper. But the appraiser pulled actual rental comps within a half-mile radius and found comparable units renting for $1,100 to $1,200 per unit. The adjusted market rent of $2,300 put the DSCR ratio at 0.92. Denied.

The investor had relied on Zillow’s rent estimate and the listing agent’s projections instead of checking actual lease comps, talking to local property managers, and looking at recent rental listings in the same neighborhood.

The Fix

Always do your own rental income research before making an offer. Here’s how:

Check Rentometer, Zillow rent estimates, and Apartments.com for the specific neighborhood, not just the zip code
Call two or three local property management companies and ask what they’d list the property for
Look at active rental listings within a half-mile for comparable properties
Use the conservative number. If comps show a range of $1,400 to $1,700, underwrite at $1,400
Account for vacancy. Most DSCR lenders factor in a 5-10% vacancy rate, but you should too in your own analysis

If the conservative rent estimate doesn’t produce a DSCR ratio of at least 1.15, the deal is risky. You want a cushion above the minimum, not a prayer.

Mistake 2: Ignoring Prepayment Penalties

DSCR loans almost always include prepayment penalties. This isn’t a surprise fee hidden in the fine print. It’s a standard feature. But too many investors don’t understand what it means or how it affects their exit strategy.

What Goes Wrong

You close on a DSCR loan with a 5-year prepayment penalty structured as 5-4-3-2-1 (meaning you pay 5% of the loan balance if you pay it off in year one, 4% in year two, and so on). Eighteen months later, the property appreciates significantly and you want to sell. On a $225,000 loan balance, your prepayment penalty is 4%, or $9,000. That $9,000 eats directly into your profit.

Or worse, you want to refinance into a better rate after two years, but the 3% prepayment penalty ($6,750) makes the refinance mathematically pointless.

The Real Scenario

An investor in Memphis closed a DSCR loan at 8.25% with a 5-year step-down prepayment penalty. Fourteen months later, rates dropped and a competing lender offered 7.0%. The investor wanted to refinance and save $250 per month. But the 4% prepayment penalty on the $200,000 balance was $8,000. At $250 per month in savings, it would take 32 months just to break even on the penalty cost. The investor was effectively trapped for three more years.

The Fix

Negotiate the prepayment penalty structure upfront. Some lenders offer 3-year penalties instead of 5-year. Others offer 3-2-1 step-downs. A shorter penalty period gives you more flexibility.
Match the penalty to your hold strategy. If you plan to hold for 7+ years, a 5-year penalty doesn’t matter. If you’re doing a BRRRR strategy and plan to refinance in 12-18 months, you need a shorter penalty or no penalty at all (expect a higher rate for this).
Calculate the breakeven. Before accepting any prepayment terms, calculate exactly how much the penalty would cost at different exit points and whether your strategy still makes sense.
Ask about yield maintenance vs. step-down penalties. Yield maintenance penalties can be significantly more expensive. Know which type you’re agreeing to.

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Mistake 3: Not Having Enough Reserves

Reserves are the cash cushion lenders want to see after you’ve paid your down payment and closing costs. They prove you can survive a few months of vacancy or unexpected repairs without defaulting on the mortgage. Underestimating this requirement is a fast track to denial.

What Goes Wrong

You have $90,000 in savings. The property requires $75,000 down and $12,000 in closing costs. That’s $87,000, leaving you with $3,000. Your lender requires 6 months of PITIA reserves. With a $2,200 monthly PITIA payment, that’s $13,200 in required reserves. You’re short by $10,200, and your application gets denied.

The Real Scenario

An investor in San Antonio found a fourplex at $400,000. Down payment at 25% was $100,000. Closing costs ran $11,000. The investor had $125,000 in liquid savings. After the down payment and closing costs, only $14,000 remained. The lender required 6 months of PITIA reserves at $3,100 per month, totaling $18,600. The investor was $4,600 short and couldn’t close.

The property went to another buyer. Three weeks of due diligence, $650 in appraisal fees, and $400 in inspection costs all wasted.

The Fix

Calculate total cash needed before making an offer: Down payment + closing costs (estimate 3-5% of loan amount) + 6 months PITIA = minimum cash required
Don’t forget to include reserves for existing properties. If you already own two rentals, some lenders require reserves for those properties too
Know what counts as reserves. Cash in savings and checking accounts count at 100%. Retirement accounts (401k, IRA) typically count at 60-70%. Stocks and bonds usually count at 70-80%. Home equity does not count.
Build your reserves before you start shopping. If you’re close to the minimum, wait an extra month or two to save more. Barely meeting the reserve requirement often leads to worse terms anyway.

Mistake 4: Choosing the Wrong Property Type for DSCR

Not every property type works well with DSCR financing. Choosing a property that doesn’t fit the program’s parameters can lead to denial, worse terms, or a DSCR ratio that doesn’t compute.

What Goes Wrong

You find a beautiful rural property on 5 acres with a detached guest house. The main house rents for $1,800 and the guest house for $900. Sounds profitable. But many DSCR lenders won’t finance properties on acreage over 2 acres. Others won’t count rental income from a detached accessory dwelling unit. Your loan gets declined or the terms are significantly worse than expected.

The Real Scenario

An investor found a mixed-use property in Austin with a ground-floor retail space and two residential units above. The combined rent was $5,200 per month, which produced an incredible DSCR ratio. But the investor’s DSCR lender only finances residential properties with 1-4 units. The commercial component made the property ineligible. The investor had to find a commercial lender, which required a larger down payment (30% instead of 25%), higher rates, and a completely different underwriting process.

Another common scenario: condos in buildings where less than 50% of units are owner-occupied, or non-warrantable condo projects. Many DSCR lenders either decline these outright or add significant rate premiums.

The Fix

Stick to standard 1-4 unit residential properties if you want the smoothest DSCR loan experience (single-family homes, duplexes, triplexes, and fourplexes)
Check lender restrictions before making offers on condos, townhomes, manufactured homes, rural properties, or properties with mixed-use components
Understand that 5-8 unit properties are available through some DSCR lenders but come with different terms and higher minimums
Avoid properties with significant deferred maintenance. If the appraisal comes back noting health and safety issues, the lender may require repairs before closing, delaying or killing the deal
Verify the property type aligns with your specific lender’s guidelines. Each DSCR lender has slightly different property eligibility criteria. Review the DSCR loan requirements for each lender you’re considering.

Mistake 5: Not Shopping Multiple Lenders

DSCR loan rates and terms vary dramatically between lenders. Taking the first offer you receive can cost you thousands of dollars per year in unnecessarily high payments.

What Goes Wrong

You apply with one DSCR lender, get quoted 8.5% with 2 points origination and a 5-year prepayment penalty. You think that’s the market rate, so you accept. Meanwhile, another lender would have offered 7.75% with 1.5 points and a 3-year prepayment penalty. On a $250,000 loan, that 0.75% rate difference costs you $1,875 per year, or $56,250 over the life of a 30-year loan.

The Real Scenario

An investor in Cleveland was quoted the following by three different DSCR lenders for the same $200,000 loan:

Lender A: 8.25% rate, 2 points origination ($4,000), 5-year prepayment penalty
Lender B: 7.875% rate, 1.5 points ($3,000), 3-year prepayment penalty
Lender C: 7.5% rate, 1 point ($2,000), 3-year prepayment penalty

The difference between the worst and best offer was $3,600 in upfront costs and $150 per month in payments. Over 5 years, Lender C saved the investor $12,600 compared to Lender A. Same property, same borrower, wildly different outcomes.

For help comparing DSCR lenders, read our guide on finding the best DSCR lenders.

The Fix

Get quotes from at least three DSCR lenders before committing. Four or five is even better.
Compare apples to apples. Look at the total cost of the loan, not just the rate. A lower rate with higher points might cost more overall than a slightly higher rate with lower fees.
Ask each lender for a full fee breakdown including origination, underwriting, processing, and any other fees
Compare prepayment penalty structures. A slightly higher rate with a shorter prepayment penalty might be more valuable than a lower rate with a 5-year lockout.
Time your applications within a 14-day window so multiple credit pulls count as a single inquiry for scoring purposes

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Mistake 6: Poor Credit Timing

Your credit score is a snapshot in time, and the timing of your DSCR loan application relative to your other financial activities can make or break your approval.

What Goes Wrong

You’re at a 720 credit score and you qualify for a 7.5% DSCR rate. Two weeks before applying, you buy a new car with a $35,000 loan. The hard inquiry drops your score 5 points. The new debt lowers your score another 15 points. You’re now at 700, and your quoted rate jumps to 7.875%. That 0.375% difference costs you nearly $1,000 per year on a $250,000 loan.

Or worse: you apply for two credit cards to earn sign-up bonuses the month before your DSCR application. Two hard inquiries and two new accounts drop your score from 680 to 645. You’re now below many lenders’ minimum threshold, and the lenders who will work with you charge significantly higher rates.

The Real Scenario

A couple in Phoenix planned to buy their first investment property. They had a 730 credit score and strong reserves. In the same month they planned to apply for a DSCR loan, they also financed new furniture ($8,000) and opened a new rewards credit card. Between the two hard inquiries, the new debt, and the decreased average account age, their credit score dropped to 695 by the time the DSCR lender pulled their report.

The rate they were quoted was 0.5% higher than what they would have received at 730. On their $200,000 loan, that cost them $1,000 per year, or $30,000 over the life of the loan. All because they bought furniture at the wrong time.

The Fix

Freeze all other credit activity 90 days before applying for a DSCR loan. No new credit cards, no car loans, no personal loans, no store financing.
Don’t close old credit accounts during this period. Closing accounts reduces your available credit and average account age.
Pay down existing credit card balances before applying. Getting utilization below 30% (ideally below 10%) can boost your score 20-50 points.
Check your credit report 90 days out and dispute any errors. Corrections take 30-45 days.
If you need to make major purchases, do them after your DSCR loan closes. The furniture, the car, and the credit card bonuses can all wait 30-45 days.

Mistake 7: Rushing the Appraisal

The appraisal determines both the property’s value and its rental income potential, making it the single most important third-party report in your DSCR loan process. Rushing into an appraisal on a property that isn’t ready can result in a low value, a failed DSCR ratio, or required repairs that delay closing by weeks.

What Goes Wrong

You go under contract on a property that needs cosmetic work. The yard is overgrown, the exterior paint is peeling, one bathroom has a leaky faucet, and the kitchen has a broken cabinet door. None of these are structural issues, but they affect the appraiser’s condition rating and comparable property selection.

The appraiser rates the property as “fair” condition instead of “good” condition, and selects lower-value comparable sales. The appraised value comes in $20,000 below the purchase price. You either need $20,000 more in cash or you lose the deal.

The Real Scenario

An investor in Indianapolis bought a 1940s bungalow for $165,000. The property had good bones but visible deferred maintenance: peeling exterior paint, a cracked window, and dated plumbing fixtures. The appraiser flagged the cracked window as a health and safety issue, requiring repair before closing. The lender issued a condition: replace the window and have the appraiser re-inspect.

The window replacement took 10 days to schedule, another 3 days to install, and the re-inspection added 5 more days. The closing was delayed by nearly three weeks. The seller was frustrated, the rate lock almost expired (which would have meant a higher rate), and the investor nearly lost the deal.

The Fix

If you’re buying a property that needs work, get an inspection before the appraisal. Identify and fix any health and safety issues (broken windows, missing handrails, exposed wiring, non-functional systems) before the appraiser visits.
Negotiate seller repairs for any visible deficiencies that could affect the appraisal. Many sellers will handle minor repairs if it means the deal closes.
Ensure the property is clean and presentable. Mow the lawn, clear debris, and make sure all utilities are on. Appraisers form impressions within the first 60 seconds.
If you’re buying a truly distressed property, consider whether a fix-and-flip loan or bridge loan is more appropriate than a DSCR loan. DSCR loans are designed for rent-ready properties, not major renovation projects.
Ask your lender about “as-repaired” appraisals. Some DSCR lenders offer these for light-rehab properties, where the appraiser values the property based on its post-repair condition. This is less common but worth asking about.

For the complete picture on how to move from application through funding, check out the full DSCR loan closing process and the steps to apply for a DSCR loan. Canadian investors should also read the DSCR loan application step by step for Canadians for LLC setup and cross-border documentation requirements.

The Bottom Line

Every one of these mistakes is avoidable. The investors who get approved quickly with the best terms aren’t lucky. They’re prepared. They verify rental income with real data. They understand their prepayment penalty options. They build reserves beyond the minimum. They choose the right property types. They shop multiple lenders. They protect their credit score. And they make sure the property is appraisal-ready before the appraiser walks through the door.

If you’re ready to start the process the right way, get connected with a DSCR lending specialist who can walk you through your specific situation and help you avoid every one of these pitfalls.

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Frequently Asked Questions

What is the most common reason DSCR loans get denied?

The most common denial reason is the property's rental income not meeting the minimum DSCR ratio. When the appraiser's market rent analysis shows income too low to cover the mortgage payment at a 1.0 to 1.25 ratio, the loan gets denied. This usually happens because the investor relied on optimistic rent estimates instead of verified market data. Always underwrite conservatively using actual rental comps from the specific neighborhood.

How much do prepayment penalties cost on DSCR loans?

Most DSCR loans use a step-down prepayment penalty structure, commonly 5-4-3-2-1 or 3-2-1. This means if you pay off the loan in year one of a 5-4-3-2-1 structure, you owe 5% of the remaining loan balance. In year two, it's 4%, and so on. On a $250,000 loan balance, a 5% penalty is $12,500. Some lenders offer shorter penalty periods (3 years) or even no prepayment penalty in exchange for a slightly higher interest rate.

How many months of reserves do I need for a DSCR loan?

Most DSCR lenders require 3 to 6 months of PITIA (Principal, Interest, Taxes, Insurance, and Association dues) in liquid reserves after your down payment and closing costs are paid. For a property with a $2,500 monthly PITIA, that means $7,500 to $15,000 in reserves. Cash counts at full value, while retirement accounts typically count at 60-70% and stocks at 70-80% of face value.

Can I use a DSCR loan on a property that needs renovation?

DSCR loans are designed for rent-ready or near rent-ready properties. If the property needs major renovation, a fix-and-flip loan or bridge loan is more appropriate. However, if the property only needs cosmetic updates (paint, flooring, landscaping) and is structurally sound with functional systems, most DSCR lenders will finance it. The key is that the appraisal cannot flag health and safety issues. Some lenders offer light-rehab DSCR products with "as-repaired" appraisals, but these are less common.

How much do DSCR loan rates vary between lenders?

Rate differences of 0.5% to 1.0% between lenders are common for the same borrower and property profile. On a $250,000 loan, a 0.75% rate difference translates to about $1,875 per year or $156 per month. Over a 30-year loan term, that's $56,250. Beyond rates, lenders also vary significantly on origination fees (1-2 points), prepayment penalty structures, reserve requirements, and minimum credit scores. Always get quotes from at least three lenders.

What credit score do I need for the best DSCR loan rates?

Most DSCR lenders offer their best rates at 740+ FICO scores. The rate tiers typically break down as: 740+ (best rates), 720-739 (slightly higher), 700-719 (moderate premium), 680-699 (noticeable premium), 660-679 (significant premium), and 620-659 (highest rates, limited lender options). Each tier step can mean a 0.25% to 0.5% rate increase. A 40-point score improvement before applying can save you tens of thousands over the loan's life.

What happens if the appraisal shows the property needs repairs?

If the appraiser identifies health and safety issues (broken windows, exposed wiring, non-functional HVAC, structural problems), the lender will issue a condition requiring repairs before closing. The repairs must be completed, and the appraiser must re-inspect and verify. This process typically adds 2 to 4 weeks to your closing timeline. To avoid this, get a property inspection before the appraisal and address any obvious issues proactively, or negotiate seller repairs as part of your purchase contract.

Should I get a DSCR loan with a fixed or adjustable rate?

Most DSCR loans are offered as 30-year fixed rate, which provides payment stability and predictable cash flow for your rental property. Some lenders offer adjustable-rate options (typically 5/1 or 7/1 ARMs) with lower initial rates. An ARM can make sense if you plan to sell or refinance within the fixed-rate period. However, if you're holding long-term, a fixed rate protects you from rising rates. Match the loan structure to your hold strategy and exit plan.

Disclaimer: LendCity Mortgages is a licensed mortgage brokerage, and our team includes experienced real estate investors. While we are qualified to provide mortgage-related guidance, the broader financial, tax, and legal information in this article is provided for educational purposes only and does not constitute financial planning, tax, or legal advice. For matters outside mortgage financing, we recommend consulting a Chartered Professional Accountant (CPA), licensed financial planner, or qualified legal advisor.

Written by

LendCity

Published

February 15, 2026

Reading Time

14 min read

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