Side by side
| Conventional | DSCR | |
|---|---|---|
| Qualifies on | Your personal income and tax returns | The property's rent |
| Down payment | 15% one unit, 25% two to four | Often 20% to 25% |
| Rate and fees | Usually lower | Usually higher |
| Prepayment penalty | None, and none to lower your rate | Common, and a longer penalty can buy a lower rate |
| Effect on your next home purchase | Payment, reserves and property count all follow you | Depends on structure and how the loan reports |
| Seller credits | Capped at 2% | Some programs allow more |
| First time investors | No landlord experience needed to buy | Often limited or priced higher |
| LLC | No, individuals | Yes, common |
| Property limit | 10 financed properties | No conventional style cap |
| Short term rental income | Projected income generally not used | Often can use market data |
| Seasoning for cash out | Stricter | Often more flexible |
General comparison. DSCR terms vary widely by lender.
When conventional wins
You're a first time investor. Your tax returns support the debt. You have fewer than 10 financed properties. You'll hold long term and want a 30 year fixed rate with no prepayment penalty. You don't need an LLC. In those cases, conventional is usually the cheaper money.
When DSCR wins
Not sure how your returns look to a lender? See Schedule E explained.
Heavy write offs make your income look thin. You're at or near 10 properties. You want to close in an LLC. You need projected short term rental income to qualify. You want to move fast without full income documentation. You'll hold long enough that a prepayment penalty buys you a better rate. The seller is offering more than 2% in credits.
The prepayment penalty twist
Conventional can't use a prepayment penalty to improve pricing. DSCR can. A DSCR loan with a three or five year prepayment penalty may price better than conventional, especially for investors who know they'll hold. Ask for DSCR quotes at different penalty lengths, and compare them against conventional over your real hold period. If there's a chance you'll sell or refinance early, price the penalty in.
Other weak spots to weigh
A conventional rental can make your next primary home harder to qualify for, since its payment, reserves and property count follow you. Conventional caps seller credits at 2% on investment property and can't close in an LLC. DSCR is tougher on first time investors. See the full list in conventional investment property loans.
Don't just compare rates
Compare total cost over your hold period: rate, points and fees, mortgage insurance on a conventional loan at 15% down, and any DSCR prepayment penalty if you might sell or refinance early. A slightly higher DSCR rate can still win if it lets you buy a deal you'd otherwise miss.
How I decide on my own deals
If a property qualifies conventionally, I usually want it there for the long term. If it doesn't, or using conventional would block my next purchase, DSCR gets the deal done. Both are tools. The mistake is using the expensive one when the cheap one was available, or missing a good deal because you only knew one.
Conventional vs DSCR cost over your hold
Compares principal and interest plus fees over your hold. Excludes taxes and insurance, which are the same. Add any prepayment penalty separately.
Frequently asked questions
Is DSCR more expensive than conventional?
Usually, in rate and fees. It can still be the right tool.
Can I switch from DSCR to conventional later?
Yes, by refinancing, watching any prepayment penalty.
Which is better for Airbnb?
Conventional if you qualify without the rent. DSCR if you need projected rent.
Which allows an LLC?
DSCR.