You have two realistic paths to finance an investment property in the United States: a DSCR loan or a conventional mortgage. Both get the job done. Both put a rental property in your portfolio. But they work in fundamentally different ways, and choosing the wrong one can cost you thousands of dollars or months of lost time.
This guide breaks down every meaningful difference between DSCR loans and conventional mortgages so you can pick the right tool for your specific situation.
What Is a DSCR Loan?
A DSCR Loan Financing qualifies you based on the property’s income rather than your personal income. DSCR stands for Debt Service Coverage Ratio, which is the property’s gross rental income divided by its total debt obligations (mortgage principal, interest, taxes, insurance, and HOA fees if applicable).
Run your numbers through our DSCR Loan Calculator to see if your property qualifies.
If a property generates $2,000 per month in rent and the total monthly debt obligations are $1,600, the DSCR is 1.25. Most lenders want a minimum DSCR of 1.0 to 1.25, meaning the property’s income covers or exceeds the mortgage payment.
The key distinction: the lender cares about the property’s cash flow, not your W-2 or tax returns.
What Is a Conventional Investment Property Mortgage?
A conventional mortgage for investment properties follows Fannie Mae and Freddie Mac guidelines. The lender qualifies you based on your personal income, credit history, assets, and debt-to-income ratio. Rental income from the subject property can supplement your qualification, but your personal finances are the primary driver.
These are the same loan programs used for primary residences, adapted with stricter requirements for investment properties.
Side-by-Side Comparison
Here is how the two loan types compare across every category that matters to investors:
| Feature | DSCR Loan | Conventional Mortgage |
|---|---|---|
| Income Documentation | None required (property income only) | Full documentation: W-2s, tax returns, pay stubs |
| Qualification Basis | Property cash flow (DSCR ratio) | Personal DTI ratio + income verification |
| Minimum Credit Score | 620-680 typical | 620 minimum, 740+ for best rates |
| Down Payment | 20-25% typical | 15-25% depending on property type |
| Interest Rates | 1-2% higher than conventional | Lower rates, tied to market benchmarks |
| Closing Timeline | 2-3 weeks possible | 30-45 days typical |
| Property Limit | No limit | 10 financed properties max (Fannie Mae) |
| LLC Closing | Yes, directly in entity name | No, must close in personal name |
| DTI Requirement | None | 45-50% maximum |
| Loan Amounts | $100K-$5M+ common | Conforming limits apply ($766,550 in 2025) |
| Property Types | 1-4 unit residential, some 5+ | 1-4 unit residential only |
| Prepayment Penalties | Common (3-5 year terms) | Typically none |
| Reserves Required | 6-12 months PITIA | 2-6 months per property |
This table tells you the mechanics. The sections below explain what those differences actually mean for your investing strategy.
When a Conventional Mortgage Wins
Conventional loans are the better choice in specific situations. If any of these describe you, start with conventional financing.
You Have Strong Documentable Income
If you earn a good salary with clean W-2 income, conventional loans reward you with lower rates. A borrower with a 760 credit score and verifiable income of $120,000 per year will get a rate 1-2 percentage points lower on a conventional loan than a DSCR loan for the same property. On a $300,000 loan, that difference is $3,000-$6,000 per year in interest.
You Want the Lowest Possible Down Payment
Conventional investment property loans can go as low as 15% down on single-family properties for well-qualified borrowers. DSCR loans typically start at 20% and often require 25%. On a $400,000 property, that’s a $20,000-$40,000 difference in cash required at closing.
You Own Fewer Than 10 Financed Properties
Fannie Mae allows up to 10 financed properties per borrower. If you’re buying your first through tenth investment property and you have the income to qualify, conventional loans give you better economics. The math is simple: lower rates and lower down payments mean higher returns.
You Want to Avoid Prepayment Penalties
Most conventional mortgages have no prepayment penalty. You can sell, refinance, or pay off the loan at any time without extra cost. DSCR loans commonly include 3-5 year prepayment penalty periods, which can cost 1-5% of the loan balance if you exit early. If your strategy involves short hold periods or frequent refinancing, this matters.
When a DSCR Loan Wins
DSCR loans solve problems that conventional mortgages cannot. These situations make the higher rate worth paying.
You’re Self-Employed or Have Complex Income
Self-employed investors often show lower taxable income on their returns due to legitimate deductions. Conventional lenders use your tax returns to qualify you, so those deductions that save you tax money can prevent you from qualifying for a mortgage.
A DSCR loan ignores your tax returns entirely. The lender never sees your Schedule C or your business write-offs. If the property cash flows, you qualify. This is the single most common reason investors choose DSCR loans.
For a full breakdown of what qualifies you, see our DSCR loan requirements guide.
You Already Own 10+ Financed Properties
Once you hit Fannie Mae’s 10-property limit, conventional financing is off the table. DSCR lenders have no property count limit. Investors with 20, 50, or 100 properties can continue financing acquisitions with DSCR loans as long as each property cash flows.
This is the scaling wall that pushes most portfolio investors toward DSCR lending.
You Want to Close in an LLC
Conventional loans must close in your personal name. You can transfer to an LLC afterward, but that technically triggers the due-on-sale clause (though lenders rarely enforce it for single-member LLC transfers). It’s a grey area that makes investors uncomfortable.
DSCR loans close directly in your LLC name with no ambiguity. The entity is the borrower. This matters for liability protection, portfolio organization, and partnership structures. Learn more about DSCR loans for LLC-based investing.
You Need to Close Fast
Conventional loans take 30-45 days to close because of the documentation and underwriting requirements. DSCR loans can close in 2-3 weeks because the underwriting is simpler—the lender evaluates the property’s income, not your entire financial life.
In competitive markets, speed wins deals. A seller choosing between two offers will often take the one that closes faster, even at a slightly lower price.
You Don’t Want to Share Personal Financial Details
Some investors simply prefer not to hand over two years of tax returns, bank statements, employment letters, and detailed financial disclosures. DSCR loans require minimal personal documentation. Your credit is pulled, but the financial deep-dive doesn’t happen.
Understanding the Rate Difference
The rate premium on DSCR loans typically runs 1-2 percentage points above conventional rates. As of early 2026, that means DSCR rates in the high 7s to low 9s compared to conventional investment property rates in the high 6s to mid 7s.
But rates alone don’t determine which loan is better. Consider the full picture:
Monthly payment comparison on a $300,000 loan (30-year term):
- Conventional at 7.0%: $1,996/month
- DSCR at 8.5%: $2,307/month
- Difference: $311/month ($3,732/year)
That $311 monthly difference matters. But if the conventional loan takes 45 days to close and you lose the deal to another buyer, you’ve lost the entire investment. If you can’t qualify conventionally because your tax returns show low income, the DSCR loan is your only option—and $311/month is cheap compared to not owning the property at all.
For current rate ranges and what drives pricing, see our DSCR loan rates guide.
The Hybrid Strategy: Using Both
Smart investors don’t choose one loan type exclusively. They use each where it makes the most sense.
Strategy 1: Conventional First, DSCR Later
Use conventional financing for your first several properties while your income documentation supports it and you’re under the 10-property limit. You’ll benefit from lower rates and down payments. Once you hit the conventional ceiling—either through property count limits or DTI constraints—switch to DSCR loans for continued growth.
Strategy 2: DSCR for Speed, Conventional Refinance Later
Buy quickly with a DSCR loan when timing matters, then refinance into a conventional loan once the dust settles and you have time for full documentation. This works particularly well for value-add properties where you’ve increased rents after acquisition.
Strategy 3: Segment by Entity
Finance properties in your personal name with conventional loans for the rate advantage. Finance properties in your LLC with DSCR loans where liability protection is the priority. Different properties may have different risk profiles that justify different structures.
Real Scenarios: Which Loan Wins?
Scenario 1: W-2 Employee Buying Property #3
Profile: Software engineer earning $150,000, 780 credit score, buying a $350,000 single-family rental.
Winner: Conventional. Strong income, high credit score, and well under the 10-property limit. The rate will be significantly lower and the down payment can be as low as 15%. No reason to pay the DSCR premium.
Scenario 2: Self-Employed Investor Buying Property #6
Profile: Business owner showing $60,000 taxable income (after deductions) but actual cash flow of $200,000. Buying a $275,000 duplex.
Winner: DSCR. The $60,000 reported income won’t support the DTI ratio needed for a conventional loan, especially with five existing mortgages. A DSCR loan ignores the tax returns and qualifies the property on its rental income alone.
Scenario 3: Scaling Investor Buying Property #12
Profile: Full-time investor with 11 existing properties, strong credit, buying a $400,000 fourplex through an LLC.
Winner: DSCR. Already past the Fannie Mae 10-property limit, and wants to close in an LLC. Conventional is simply not available. DSCR is the only realistic option.
Scenario 4: Investor in a Competitive Market
Profile: Any investor competing against multiple offers on a desirable rental property.
Winner: DSCR. The 2-3 week closing timeline can make the difference between winning and losing the deal. The rate premium is the cost of speed.
Scenario 5: Fix-and-Flip Investor With Rentals
Profile: Investor who flips 4-5 houses per year and holds 3 rentals. Irregular income from flips, wants to add a rental.
Winner: DSCR. Flip income is hard to document consistently for conventional qualification. The spiky, project-based income doesn’t fit conventional underwriting well. DSCR sidesteps the income documentation entirely.
Key Considerations Before You Decide
Calculate Your Actual Cost of Capital
Don’t just compare rates. Calculate the total cost of each loan over your expected hold period, including origination fees, prepayment penalties, rate differences, and down payment requirements. A DSCR loan with a higher rate but faster closing might generate more total profit than a conventional loan you had to wait months to close.
Think About Your Five-Year Plan
If you plan to buy one or two properties and hold them for decades, conventional loans make sense. If you plan to scale aggressively to 10, 20, or 50 properties, you’ll need DSCR loans eventually—and getting comfortable with them now has value.
Don’t Forget About the Pros and Cons
Every loan type has trade-offs beyond rates and qualification. Prepayment penalties, reserve requirements, seasoning periods, and lender flexibility all factor into your decision. Review the full pros and cons of DSCR loans to understand the complete picture.
Talk to a Specialist
The right answer depends on your specific financial situation, investment goals, and timeline. A financing specialist who works with both loan types can model the numbers for your exact scenario and recommend the best path forward. For a personalized comparison across all available options, review our guide on which LendCity financing program is right for you.
Frequently Asked Questions
Can I switch from a DSCR loan to a conventional mortgage later?
Do DSCR loans require tax returns at all?
Which loan type has lower closing costs?
Can I get a DSCR loan on a property that doesn't have tenants yet?
Is a DSCR loan the same as a hard money loan?
What happens if my property's DSCR falls below 1.0 after closing?
Can I use both loan types at the same time?
Do DSCR loans report to my personal credit?
Making Your Decision
There is no universally better loan type. Conventional mortgages offer lower rates and down payments for borrowers with strong documentable income and fewer than 10 properties. DSCR loans offer flexibility, speed, and scalability for self-employed investors, portfolio builders, and anyone who wants to close in an LLC.
The best investors use both strategically. Start with whichever fits your current situation, and don’t hesitate to switch as your portfolio and goals evolve. The right financing is whatever gets you into cash-flowing properties at a cost that makes the numbers work.
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
11 min read
Down Payment
The upfront cash payment when purchasing a property. For 1-4 unit investment properties, minimum 20% down is required. 5+ unit multifamily can use CMHC MLI Select with lower down payments, and house hackers can put as little as 5% down on owner-occupied 2-4 plexes.
DSCR
Debt Service Coverage Ratio - a metric that compares a property's net operating income to its mortgage payments. A DSCR of 1.25 means the property generates 25% more income than needed to cover the debt. Lenders typically require a minimum DSCR of 1.0 to 1.25 for investment property loans.
Coverage Ratio
A measure of a property's ability to cover its debt payments, typically referring to DSCR. Commercial lenders often require a minimum of 1.2, meaning the property's net operating income exceeds debt payments by at least 20%.
Conventional Mortgage
A mortgage with 20% or more down payment, not requiring default insurance. This is the standard financing type for investment properties in Canada, as high-ratio (insured) mortgages aren't available for pure rentals.
Cash Flow
The money left over after collecting rent and paying all expenses including mortgage, taxes, insurance, maintenance, and property management.
Single Family
A detached home designed for one household, the most common property type for beginner real estate investors.
Value-Add Property
A property with potential to increase value through renovations, better management, rent increases, or adding units.
Refinance
Replacing an existing mortgage with a new one, typically to access equity, get a better rate, or change terms. Investors commonly refinance to pull out capital for purchasing additional properties (cash-out refinance) while retaining ownership of the original property.
DSCR Loan
A loan qualified based on the property's Debt Service Coverage Ratio rather than the borrower's personal income, popular for US investment properties.
LLC
Limited Liability Company - a US business structure commonly used to hold investment properties, providing liability protection and tax flexibility.
Closing Costs
Fees paid when completing a real estate transaction, including legal fees, land transfer tax, title insurance, appraisals, and adjustments.
Mortgage Penalty
A fee charged for breaking your mortgage early, calculated as either 3 months' interest or the Interest Rate Differential (IRD), whichever is greater.
Credit Score
A numerical rating (300-900 in Canada) that represents your creditworthiness, affecting mortgage rates and approval. 680+ is typically needed for best rates.
Interest Rate
The cost of borrowing money, expressed as a percentage. It determines how much you pay on top of the principal borrowed.
Principal
The original amount of money borrowed on a mortgage, not including interest. Each mortgage payment includes both principal (paying down what you owe) and interest (the cost of borrowing). Over time, more of each payment goes toward principal as the loan balance decreases.
Appraisal
A professional assessment of a property's market value, required by lenders to ensure the property is worth the loan amount.
Title Insurance
Insurance that protects against losses from defects in title to a property, such as liens, encumbrances, or ownership disputes.
Underwriting
The process lenders use to evaluate the risk of a mortgage application, including reviewing credit, income, assets, and property value to determine loan approval.
Market Rent
The rental rate that a property could reasonably command in the current market based on comparable properties, location, and condition. Understanding market rent is essential to maximize income while maintaining competitive positioning and minimizing vacancy.
Rental Income
Revenue generated from tenants paying rent on an investment property. Gross rental income is the total collected before expenses, while net rental income subtracts operating costs to show actual profitability.
Duplex
A residential property containing two separate dwelling units, either side-by-side or stacked. Duplexes are popular among beginner investors because they can house-hack by living in one unit while renting the other to offset mortgage costs.
Fourplex
A residential property containing four separate dwelling units. Fourplexes represent the largest property type that typically qualifies for residential mortgage financing, offering strong cash flow potential while avoiding commercial lending requirements.
Condo Fees
Monthly fees paid by condo owners to cover building maintenance, insurance, common area utilities, reserve fund contributions, and amenities. Also known as strata fees or maintenance fees, these directly reduce cash flow and are a critical consideration when analyzing condo investment opportunities.
Recourse Loan
A loan where the borrower is personally liable for repayment beyond the collateral value. If the property sells for less than owed at foreclosure, the lender can pursue the borrower's other assets. Most Canadian commercial mortgages under $5 million are full recourse.
Due-on-Sale Clause
A mortgage provision requiring the borrower to repay the loan in full if the property is sold or transferred. Transferring a property into a corporation may trigger this clause, requiring lender approval or refinancing.
Hard Money Loan
A short-term loan from private lenders secured by the property itself rather than the borrower's creditworthiness. Hard money loans offer fast approvals and flexible terms but at higher interest rates, commonly used for fix-and-flip projects and bridge financing.
Debt-to-Income Ratio
A lending metric that compares a borrower's total monthly debt payments to their gross monthly income. Lenders use DTI to assess borrowing capacity, with most requiring ratios below 44% for mortgage approval.
Above-Market Rent
Rental rates higher than comparable properties in the same area. Above-market rents can inflate DSCR calculations artificially and may lead to higher vacancy or tenant turnover when leases expire.
Hover over terms to see definitions, or visit our glossary for the full list.