For a long time, I stayed away from DSCR loans.
They felt expensive. The terms were murky. And I didn’t love the idea of a 5-year prepayment penalty locking me in.
But like most investors, I eventually hit a wall with conventional financing — and DSCR loans quickly went from “interesting” to essential.
Now that I’ve used them on multiple deals, I can confidently say: they’re not perfect… but they can be incredibly useful.
If you’re self-employed, investing through an LLC, or trying to scale without the endless paperwork of traditional lenders, DSCR loans open up doors that would otherwise stay closed.
But they also come with surprises — both good and bad.
This post breaks down what DSCR loans actually are, how they work, and everything I’ve learned from using them in real deals.
If you’re thinking about going this route, here’s what you need to know before you do.
What Is a DSCR Loan?
DSCR stands for Debt Service Coverage Ratio — but don’t let the acronym scare you off.
The basic idea is simple: instead of qualifying based on your personal income, you qualify based on the income the property generates.
If the rent covers the mortgage — usually by a certain buffer like 1.0x or 1.2x — you’re in the game.
That’s it.
There are plenty of posts out there that dive into the technical details and math. This isn’t one of those.
I’m more interested in sharing how DSCR loans have actually worked for me in the real world — the good, the frustrating, and the deals that wouldn’t have happened without them.
Pros of DSCR Loans
DSCR loans can be a game-changer for real estate investors who don’t qualify for conventional financing.
Whether you’re self-employed, investing through an LLC, or simply want a faster, less paperwork-heavy process, DSCR loans open up options that might otherwise be out of reach.
They’re not perfect — and we’ll get to that — but there’s a reason they’ve become so popular with investors.
1. You Don’t Need W2 Income
This is the biggest draw for me — and probably for most investors who are scaling.
When I used a DSCR loan on my Dougie Fresh duplex, I no longer had W2 income.
I had already transitioned out of a “normal” job and was living off investments and business income.
Traditional lenders took one look at my tax returns and basically said “nah.”
But with a DSCR lender? They didn’t care about my personal income at all. No tax returns.
No employment history. No explaining my LLC structure or trying to back into a DTI ratio.
All they wanted to see was that the rent would cover the mortgage. Simple as that.
For full-time investors, early retirees, or anyone with “non-traditional” income, this opens up a path that would otherwise be closed.
In a way, it puts the focus back on the deal — not your personal financial situation.
2. DSCR Loans Are Great for LLC-Owned Properties
Most conventional lenders hate LLCs.
They want you to buy in your personal name and transfer title later — which opens up a whole can of worms with liability, insurance, and due-on-sale clauses.
With DSCR loans, LLC ownership is the norm. In fact, most DSCR lenders won’t even let you buy in your personal name.
I used a DSCR loan on a duplex I co-own with a friend, and we purchased it directly in our LLC.
No weird title transfers. No underwriting headaches. It was clean.
This is huge if you care about asset protection, tax planning, or if you’re partnering with someone else. The flexibility is a breath of fresh air compared to how rigid most banks are.
Check out my related post about why you probably don’t need an LLC.
3. The DSCR Loan Process is Generally Easier
Now, this depends a bit on the lender — some DSCR shops are more institutional, others feel like they’re run out of a WeWork — but generally speaking, the process is way less invasive.
There’s no employment verification. No bank statement audits.
No combing through your last two years of tax returns and asking why you wrote off $8,000 in “home office expenses.”
If the deal pencils out and you’ve got the down payment, you’re in the game.
That’s not to say the process is always fast or smooth — I’ve had some clunky experiences — but compared to a conventional loan, it often feels like a lighter lift.
Especially if you’re doing multiple deals a year and don’t want to get bogged down chasing paperwork.
4. DSCR Loans Often Still Have Competitive Rates
There’s this assumption that DSCR loans come with terrible rates.
That used to be true — and in some cases still is — but I’ve found that if you’re willing to accept a prepayment penalty, the rates can actually be in the same ballpark as conventional loans.
That’s what I did.
I took the 5-year PPP and locked in a rate that was actually BETTER than what a bank would’ve offered — and frankly, they wouldn’t have approved me anyway.
It’s a tradeoff, but if you’re planning to hold the property long-term, it’s often worth it.
Now, if you want to refi or sell in the next few years, the PPP becomes more of a factor.
But for BRRRRs you plan to hold or cash-flowing rentals you’re parking for the long haul, the rate is probably not going to be your limiting factor.
Cons of DSCR Loans
As helpful as DSCR loans can be, they definitely come with strings attached.
I’ve used them a few times now, and while I’m glad they exist, I’ve also run into enough surprises to know they’re not plug-and-play.
You need to understand the tradeoffs before diving in.
Here’s what I’ve learned:
1. There is No DSCR Loan Standardization
This was my biggest surprise and challenge.
DSCR loans are the Wild West compared to conventional loans. There’s no standardization.
Fees, rates, loan-to-value limits, seasoning periods—every lender is different. And they don’t exactly advertise their criteria.
That means comparing lenders can be a major pain. I was shocked at how different two offers could be on the same property.
You really need to shop around and ask the right questions.
2. Prepayment Penalties Can Box You In
This is a big one that investors overlook: most DSCR loans come with a 5-year prepayment penalty.
That means if you sell or refinance before year 5, you’ll pay a steep fee — often 3–5% of the loan balance in year one, scaling down after that.
That’s not something you’ll find with a typical conventional loan. And it makes DSCR loans a lot less flexible than people realize.
You can often pay more upfront to reduce the penalty term (some lenders offer 3-year or step-down options), but you’ll be trading rate or fees to get that flexibility.
If you’re the kind of investor who likes to refi or reposition deals quickly, make sure the PPP terms align with your plan.
Otherwise, you might feel stuck.
3. DSCR Ratio Can Limit Loan Amount
It’s easy to forget that just because a deal cash flows, that doesn’t mean it qualifies under every lender’s model.
DSCR lenders don’t just ask “does this make money?”
They ask, “does this hit our specific coverage ratio based on our underwriting assumptions?”
That includes property taxes, insurance, maybe HOA dues, and often not the rent you believe you can get — but whatever number they pull from Zillow, a lease, or a rental comp form.
While this usually isn’t an issue in high cash flowing markets like Detroit, I have seen it kill deals in other markets.
4. Higher Down Payments
Most DSCR lenders want to see 20-25% down. Some will go lower, but you’ll pay for it with a higher rate or fees.
This isn’t necessarily a dealbreaker, but it’s worth noting—especially if you’re used to putting 15% down with a conventional loan and mortgage insurance.
This is probably more applicable to those working FHA loans or other super low down payment options.
For me, it was the opposite.
I was accustomed to a 70% loan-to-value (LTV) on 2+ unit properties with conventional loans.
But I was able to get 80% LTV on a refinance of my duplex and 75% on a purchase with my DSCR lender.
Again, all DSCR lenders have different standards so it’s worth shopping around.
Final Thoughts on DSCR Loans
DSCR loans are an amazing tool—but they’re not perfect.
They open the door for investors who don’t fit the conventional mold, and they’re especially useful for LLC-owned properties and BRRRR deals.
But you have to do your homework. Every lender plays by different rules, and the lack of transparency can be frustrating.
If you go this route, talk to multiple lenders. Understand their fees, prepayment penalties, and DSCR requirements. And make sure the deal makes sense even if the terms aren’t perfect.
Used wisely, DSCR loans can be a powerful part of your investing toolkit.