10 DSCR Loan Myths That Could Cost You Money

DSCR loans remain misunderstood despite growing popularity among real estate investors. Misconceptions about rates, requirements, and property types prevent qualified investors from accessing this financing tool—or worse, lead them into bad deals based on incorrect assumptions.

Let's debunk the ten most damaging myths about DSCR loans and replace them with accurate information.

Myth #1: DSCR Loans Are Only for Experienced Investors

The Myth: "You need 5+ rental properties to qualify for a DSCR loan."

The Reality: First-time rental property buyers qualify for DSCR loans regularly.

DSCR loans qualify you based on the property's cash flow, not your investor resume. A first-time buyer with strong credit (720+), 25% down payment, and 6-12 months reserves can absolutely get approved.

What's true: Experienced investors often get better terms—maybe 0.25% lower rates or reduced reserve requirements. But the product is accessible to beginners.

First-timer advantages:

• No income verification means W-2 employees qualify just as easily as self-employed investors
• Your lack of experience doesn't disqualify you
• Good credit and solid down payment matter more than your number of properties

How to maximize approval as a first-timer:

• Target properties with strong DSCR (1.20+ instead of 1.05)
• Put down 25-30% to improve your risk profile
• Maintain 740+ credit score
• Show 12 months reserves instead of minimum 6 months

Bottom line: Don't avoid DSCR loans thinking you're not "experienced enough." If the property cash flows and you have down payment and reserves, you likely qualify.

Myth #2: DSCR Loan Rates Are Significantly Higher Than Conventional

The Myth: "DSCR loans cost 3-5% more than conventional mortgages."

The Reality: DSCR loans run 1-2% higher than conventional investment property loans, not primary residence mortgages.

Accurate comparison (as of early 2026):

• Conventional primary residence: 6.0-7.0%
• Conventional investment property: 6.5-7.75%
• DSCR loan: 7.5-9.5%

DSCR loans cost about 0.75-1.75% more than conventional investment property loans, not 3-5% more.

Why the premium exists:

• No income verification = higher lender risk
• Investment properties default more than owner-occupied
• Secondary market pricing (investor demand for these loan pools)

When DSCR is actually cheaper: Self-employed borrowers with complex income often pay similar rates on conventional and DSCR loans once you factor in:

• Conventional rate hits for self-employed (0.25-0.50%)
• Conventional overlays for complex income (additional 0.25%)
• Time cost of gathering 2 years tax returns, P&L statements, etc.

Trade-off: You're paying a small premium (1-2%) for massive convenience (no tax returns, faster closing, simpler process).

Myth #3: You Need Perfect Credit for DSCR Loans

The Myth: "DSCR lenders only approve borrowers with 780+ credit scores."

The Reality: Most DSCR lenders work with credit scores as low as 660, with some going to 620.

Actual credit score requirements:

• 620-659: Available but limited lenders, high rates (9.5-11%), strict terms
• 660-679: Moderate rates (9.0-10%), 1.20+ DSCR usually required
• 680-699: Standard rates (8.5-9.5%), 1.15+ DSCR required
• 700-739: Good rates (8.0-9.0%), 1.10+ DSCR
• 740+: Best rates (7.5-8.5%), 1.00 DSCR may be acceptable

The score-DSCR trade-off: Lower credit requires higher DSCR to compensate for risk.

Example:

• 760 credit, 1.05 DSCR: Approved at 8.0%
• 680 credit, 1.05 DSCR: Declined
• 680 credit, 1.25 DSCR: Approved at 9.25%

Credit improvement matters: Moving from 690 to 740 can reduce your rate by 0.50-0.75%—about $140/month on a $400,000 loan.

Bottom line: Don't assume you need perfect credit. If your score is 680+, you have legitimate DSCR loan options.

Myth #4: DSCR Loans Require 40-50% Down Payment

The Myth: "You can't get a DSCR loan without putting down 40-50%."

The Reality: Standard DSCR loans allow 20-25% down (75-80% LTV).

Actual down payment tiers:

• 10-15% down (85-90% LTV): Rarely available, very high rates, strict requirements
• 20% down (80% LTV): Available with strong credit (740+) and 1.20+ DSCR
• 25% down (75% LTV): Standard, best pricing tier for most lenders
• 30-35% down (65-70% LTV): Often earns 0.25-0.50% rate discount
• 40%+ down: Usually unnecessary unless borrower profile is very weak

The sweet spot: 25% down (75% LTV) offers best combination of leverage and pricing.

Why the myth exists:

• Commercial loans often require 30-40% down
• Some conservative DSCR lenders max out at 70% LTV
• First-time DSCR borrowers are sometimes steered toward safer deals with more equity

Exception: Properties with DSCR under 1.10 or credit scores under 700 may need 30%+ down to qualify.

Bottom line: Budget for 25% down as standard, not 40-50%. If you have 40% to put down, you'll get excellent terms, but it's not required.

Myth #5: DSCR Loans Are Only for Single-Family Homes

The Myth: "DSCR lenders won't finance multifamily properties, condos, or unique properties."

The Reality: DSCR loans are available for diverse property types, each with specific guidelines.

Properties that qualify:

Single-family homes: Best terms, 75-80% LTV, lowest rates

2-4 unit multifamily:

• Fully qualified
• Usually 75% max LTV
• Rates 0.25-0.50% higher than single-family
• Each unit's rent counts toward total rental income

Condos (warrantable):

• Qualified with HOA review
• 75% LTV typical
• Rates 0.25-0.50% higher
• Must meet warrantability guidelines (low delinquency, adequate reserves)

Condos (non-warrantable):

• Available but with restrictions
• 70-75% max LTV
• Rates 0.50-1.00% higher
• Examples: high investor concentration, HOA litigation, low reserves

Townhomes: Treated like condos if HOA exists, like SFH if no HOA

Properties over 1 acre: Available but may face rate premium of 0.25-0.50%

Rural properties: Qualified but appraisals take longer and rates may be 0.25% higher

Properties that typically DON'T qualify:

• 5+ unit properties (commercial financing territory)
• Mixed-use (residential + commercial)
• Land or lots without structures
• Properties with major damage or safety issues
• Co-ops (very limited DSCR lenders work with co-ops)

Bottom line: Don't limit yourself to single-family homes. 2-4 units and condos absolutely qualify, often with only modest rate premiums.

Myth #6: You Can't Use DSCR Loans for Cash-Out Refinances

The Myth: "DSCR loans are only for purchases, not refinancing."

The Reality: DSCR cash-out refinances are common and popular among experienced investors.

DSCR refinance types:

Rate-and-term refinance:

• Lower your rate or change loan terms
• Minimal or no cash out (typically under $2,000)
• Standard pricing, same as purchase

Cash-out refinance:

• Extract equity from the property
• Usually 75% max LTV (some lenders allow 80%)
• Rates typically 0.25-0.75% higher than purchase
• Must meet DSCR requirements on new loan amount

Delayed financing:

• Refinance property you recently purchased cash
• Usually within 6 months of cash purchase
• Treat as cash-out refinance
• Popular for fix-and-flip-to-rental conversions

Cash-out example:

• Property value: $500,000
• Current mortgage: $250,000
• Max cash-out at 75% LTV: $375,000 new loan
• Cash to you: $375,000 - $250,000 = $125,000 (minus closing costs)

Requirements:

• Property must still meet DSCR minimum on new loan amount
• 6-12 months reserves on new loan balance
• Property must appraise at refinance value

Seasoning requirements: Some lenders require 6-12 months ownership before cash-out refinance. Others allow immediate refinancing.

Bottom line: Cash-out refinancing is a core DSCR loan use case. Many investors buy with conventional loans, build equity, then refinance to DSCR to pull cash out tax-free.

Myth #7: DSCR Calculation Is Simple and Standardized

The Myth: "All lenders calculate DSCR the same way."

The Reality: DSCR calculations vary significantly between lenders, affecting qualification.

Variables in DSCR calculation:

Rental income:

• Some lenders use 75% of gross rent (assuming 25% vacancy/maintenance)
• Others use 100% of appraised market rent
• Some use actual lease amount if higher than appraisal

Expenses included:

• All lenders include: Principal, Interest, Property Taxes, Insurance
• Most include: HOA dues
• Some include: Property management fees (even if you self-manage)
• Some include: Utilities (if landlord-paid)

Property management assumption:

• Conservative lenders deduct 8-10% for property management even if you self-manage
• Most lenders don't deduct management fees unless actually incurred

Example of variance:

Property: $2,500/month market rent, $2,100 PITIA

Lender A (uses 100% rent):

• DSCR = $2,500 / $2,100 = 1.19 ✓ Qualifies

Lender B (uses 75% rent):

• DSCR = ($2,500 × 0.75) / $2,100 = 1,875 / $2,100 = 0.89 ✗ Doesn't qualify

Lender C (deducts 10% management):

• DSCR = ($2,500 × 0.90) / $2,100 = $2,250 / $2,100 = 1.07 ✓ Qualifies but marginal

Why this matters: A property might qualify with Lender A but not Lender B. Always ask lenders how they calculate DSCR.

Bottom line: "DSCR calculation" isn't standardized. Understand your lender's methodology and shop lenders if you're borderline.

Myth #8: DSCR Loans Take Forever to Close

The Myth: "DSCR loans take 60-90 days to close because of complicated underwriting."

The Reality: Most DSCR loans close in 21-35 days, similar to conventional mortgages.

Actual timelines:

• Fast track (experienced borrower, complete docs, no issues): 15-21 days
• Standard (typical transaction): 25-35 days
• Challenged (complex property, documentation gaps, title issues): 45-60 days

Why DSCR can actually close faster than conventional:

• No income verification = less documentation
• No employment verification calls
• No tax return analysis
• Simpler underwriting focused on property cash flow

What slows DSCR closings (same as conventional):

• Appraisal delays (especially rural properties)
• Title issues
• Borrower slow to submit documents
• HOA document delays (condos)
• Insurance challenges

Comparison:

• DSCR loan: 25-35 days average
• Conventional investment property loan: 30-45 days average
• Commercial loan: 45-90 days average
• Hard money: 5-15 days average (but high rates)

Bottom line: DSCR loans don't take longer than conventional loans. With good preparation, they often close faster due to less documentation.

Myth #9: DSCR Loans Always Have Prepayment Penalties

The Myth: "All DSCR loans lock you in for 3-5 years with huge penalties if you sell or refinance."

The Reality: 60-70% of DSCR loans include prepayment penalties, but many don't—and they're often negotiable.

Prepayment penalty reality:

Loans with no penalty:

• Available from most lenders
• Rates typically 0.25-0.75% higher than with penalty
• Full flexibility to sell or refinance anytime

Loans with penalty:

• Common structures: 3-year or 5-year
• Penalties typically 2-5% of remaining balance
• Often "soft" penalties (only on refinance, not sale)
• Trade-off: 0.25-0.75% lower rate

Example:

• No penalty option: 8.5% rate
• 3-year penalty option: 8.0% rate
• 5-year penalty option: 7.75% rate

Negotiability:

• Penalty terms are often negotiable
• Ask for step-down (5-4-3-2-1 instead of flat 5%)
• Ask for soft penalty (refinance only) instead of hard (any payoff)
• Ask for shorter period (3 years instead of 5)

When penalties make sense:

• You're confident holding 5+ years
• The rate reduction justifies the restriction
• Property is strong long-term hold

When to avoid penalties:

• You're uncertain about hold period
• You're a serial refinancer optimizing rates
• Property is in volatile market where you might need to exit

Bottom line: Prepayment penalties are common but not universal. If flexibility matters, pay slightly higher rate for no penalty. Don't assume you're automatically locked in.

Myth #10: DSCR Loans Are "Sub-Prime" or Predatory

The Myth: "DSCR loans are like the sub-prime mortgages that caused the 2008 financial crisis."

The Reality: DSCR loans are conservative, asset-based financing—fundamentally different from pre-2008 sub-prime.

Key differences from sub-prime:

Pre-2008 sub-prime loans:

• Qualified borrowers who couldn't afford the payment
• Stated income with no verification ("liar loans")
• Low/no down payment (95-100% LTV common)
• Adjustable rates with payment shock (teaser rates jumping to 10%+)
• Negative amortization (loan balance grew over time)
• Given to owner-occupants with limited financial literacy

Modern DSCR loans:

• Qualify properties that can afford the payment (DSCR ≥1.0)
• No income verification because property income is verified
• Substantial down payment required (20-30%)
• Fixed rates or conservative ARMs common
• Fully amortizing loans
• Given to investors who understand real estate financing

DSCR underwriting is actually conservative:

• Lenders verify the property generates sufficient cash flow
• 20-30% equity requirement provides cushion
• Reserve requirements ensure borrower can handle vacancies
• Property-based qualification means payment affordability is proven, not assumed

The non-QM category: DSCR loans fall under "non-QM" (non-qualified mortgage) only because they don't verify income—not because they're risky or predatory.

"Non-QM" sounds scary but includes:

• Bank statement loans for self-employed
• Asset depletion loans for retirees
• DSCR loans for investors
• All are legitimate products for borrowers who don't fit conventional boxes

Actual risk comparison:

• Sub-prime 2006: Borrowers with 550 credit, no down payment, inflated appraisals, no income verification, can't afford payment
• DSCR 2026: Investors with 700+ credit, 25% down, conservative appraisals, verified property cash flow, property affords its own payment

Bottom line: DSCR loans are not sub-prime. They're asset-based lending products designed for real estate investors. The underwriting is fundamentally sound: the property must generate enough income to pay for itself.

Why These Myths Persist

Information gaps: DSCR loans are newer to mainstream investors than conventional mortgages. Information lags reality.

Lender marketing: Some lenders over-emphasize requirements to discourage unqualified applicants.

Borrower exaggeration: "I got a great DSCR loan with 40% down and 780 credit" becomes "You NEED 40% down and 780 credit."

Confusion with commercial loans: DSCR loans get confused with commercial real estate loans, which do have 30-40% down requirements and longer timelines.

2008 hangover: Anything labeled "non-QM" or "no income verification" triggers 2008 financial crisis associations, even though modern underwriting is completely different.

The Truth About DSCR Loans

What they are:

• Mortgages for investment properties that qualify based on rental income instead of borrower income
• 20-25% down payment typical
• Rates 1-2% higher than conventional investment property loans
• Available for purchases, refinances, and cash-outs
• Accessible to first-time and experienced investors
• Close in 21-35 days on average

What they're not:

• Exclusively for experienced investors
• Prohibitively expensive
• Requiring perfect credit
• Limited to single-family homes
• Always locked in with prepayment penalties
• Sub-prime or predatory

Bottom Line

DSCR loan myths prevent qualified investors from accessing valuable financing. The reality is more favorable than the myths suggest:

• You don't need to be an experienced investor
• Rates are reasonable (1-2% premium over conventional investment loans)
• Credit requirements start at 660-680, not 780+
• 25% down is standard, not 40-50%
• Diverse property types qualify
• Cash-out refinancing is absolutely available
• Closing timelines match conventional loans
• Prepayment penalties are optional
• These are legitimate, conservatively underwritten loans

Do your research, talk to multiple lenders, and evaluate DSCR loans based on facts rather than misconceptions. For many real estate investors, DSCR financing is the most efficient path to scaling a rental portfolio.