FHA vs DSCR Loan for Rental Properties: Which Should Investors Use?

FHA loans and DSCR loans are both used to buy properties that generate rental income—but they play by completely different rules. FHA loans are government-backed, require you to live in the property, and come with strict guidelines. DSCR loans are designed specifically for investors who won't occupy the property and qualify based on rental income alone.

Understanding when to use each one can save you thousands on your down payment, get you into your first deal faster, or help you scale a portfolio that conventional financing can't support.

FHA Loans: The Basics

FHA loans are insured by the Federal Housing Administration and issued by FHA-approved lenders. They were created to help Americans buy homes they'll live in. Key features:

• Down payment: 3.5% with a 580+ credit score; 10% with a 500–579 score
• Interest rates: Typically 0.25%–0.50% below conventional rates (around 6.25%–7.0% in 2026)
• Mortgage insurance: Upfront MIP of 1.75% of the loan amount + annual MIP of 0.55%–1.05% (for the life of the loan in most cases)
• Occupancy: You must live in the property as your primary residence for at least 12 months
• Property types: 1–4 unit residential
• Loan limits: $524,225 for a single-family home in most areas; up to $1,209,750 in high-cost areas (2026 limits)
• Credit score: 500 minimum (580 for 3.5% down)
• DTI limit: Up to 57% with compensating factors (43%–50% typical)
• Max financed properties: 1 FHA loan at a time (with limited exceptions)

The Occupancy Requirement

This is the single most important rule. FHA loans require owner-occupancy. You must intend to live in the property as your primary residence within 60 days of closing, and you must live there for at least 12 months.

What this means for investors: You can't use an FHA loan to buy a property you won't live in. Period. Misrepresenting occupancy on an FHA application is mortgage fraud—a federal crime with serious consequences.

However, there's a completely legal strategy that bridges FHA loans and rental income: house hacking.

DSCR Loans: The Basics (Refresher)

DSCR loans are designed for non-owner-occupied investment properties. The lender qualifies the deal based on the property's rental income relative to its mortgage payment:

DSCR = Monthly Rent ÷ Monthly PITIA

• Down payment: 20%–25%
• Interest rates: 7.0%–8.5%
• Mortgage insurance: None
• Occupancy: Non-owner occupied only (investment property)
• Property types: 1–4 unit residential, some 5–8 unit
• Loan limits: $1M–$3M+ (no government cap)
• Credit score: 620–680 minimum
• DTI limit: Not calculated
• Max financed properties: No limit

Full Comparison

House Hacking with FHA: The Investor's Entry Point

House hacking is the strategy that makes FHA loans relevant for investors. Here's how it works:

1. Buy a 2–4 unit property with an FHA loan (3.5% down)
2. Live in one unit as your primary residence
3. Rent out the other units to tenants
4. Tenants pay most or all of your mortgage
5. After 12 months, move out and rent all units—or keep living there

Why This Works So Well

FHA allows you to buy a 2–4 unit property with the same 3.5% down payment as a single-family home. That's extraordinary leverage.

Example: FHA Duplex Purchase

• Purchase price: $400,000
• Down payment: $14,000 (3.5%)
• Loan amount: $386,000
• Upfront MIP: $6,755 (rolled into loan)
• Total loan: $392,755
• Rate: 6.5%
• Monthly P&I: $2,483
• Taxes + insurance: $600
• Annual MIP: ~$2,800/year ($233/month)
• Total monthly: $3,316
• Unit 1 rent (your unit): $0 (you live there)
• Unit 2 rent: $1,800
• Your effective housing cost: $1,516/month

After 12 months, you move out and rent both units:

• Total rent: $3,600/month
• Total payment: $3,316/month
• Monthly cash flow: $284/month (before maintenance/vacancy)

You just acquired a cash-flowing rental property for $14,000 out of pocket.

FHA House Hack Limitations

• You can only have one FHA loan at a time (unless you're relocating or the family outgrows the home)
• FHA has strict property condition requirements (no deferred maintenance, must pass FHA appraisal)
• Mortgage insurance is permanent on most FHA loans (you'd refinance into conventional to remove it)
• FHA loan limits may not cover multifamily prices in expensive markets
• 75% of rental income from other units can be used to qualify (FHA underwriting guideline)

When FHA Beats DSCR

1. You're a First-Time Investor with Limited Cash

The math is clear: 3.5% down vs. 20%–25% down. On a $300,000 property:

• FHA down payment: $10,500
• DSCR down payment: $60,000–$75,000

If you have $20,000 saved, FHA gets you in the door. DSCR doesn't.

2. You're Willing to Live in the Property

If you're young, single, or flexible about where you live, house hacking with FHA is one of the highest-ROI moves in real estate investing. You get below-market rates, minimal down payment, and tenants subsidizing your housing.

3. You Want the Lowest Possible Interest Rate

FHA rates are typically 0.75%–1.5% lower than DSCR rates. On a $350,000 loan, that's $200–$400/month in savings. The catch is the mortgage insurance premium (MIP), which partially offsets the rate advantage.

True cost comparison on a $350,000 loan:

• FHA at 6.5% + 0.55% annual MIP = effective rate of ~7.05%
• DSCR at 7.5% with no MIP = effective rate of 7.5%

FHA still comes out ahead by about 0.45%—roughly $130/month. But you have to live there.

4. Your Credit Score Is Below 620

DSCR lenders require a 620+ FICO. FHA goes down to 500 (with 10% down) or 580 (with 3.5% down). If your credit is in the 550–619 range, FHA may be your only option for a reasonable rate.

When DSCR Beats FHA

1. You're Not Living in the Property

This is the dealbreaker. If you're buying a property purely as an investment—you already have a home and don't plan to move—FHA isn't an option. DSCR is designed exactly for this.

2. You Already Have an FHA Loan

You can only have one FHA loan at a time. If you used FHA to buy your current home, you need a different product for your next investment. DSCR has no limit on the number of loans.

3. You Want to Scale Beyond One or Two Properties

FHA gets you one property. Conventional loans get you up to 10 (with increasing difficulty). DSCR has no cap. Investors with 20, 30, or 50+ properties use DSCR because there's no DTI ceiling and no limit on the number of financed properties.

4. You Don't Want Income Verification

FHA requires full income documentation: tax returns, W-2s, pay stubs, and employment verification. If you're self-employed with complicated taxes, this can be a headache. DSCR skips all of it.

5. The Property Doesn't Meet FHA Standards

FHA appraisals are notoriously strict. Peeling paint, broken handrails, missing smoke detectors, roof issues—any of these can trigger required repairs before closing. DSCR appraisals focus on value and marketability, not FHA-specific health and safety standards.

6. You Want to Close in an LLC

FHA loans must be in your personal name. DSCR loans can close directly in an LLC, which many investors prefer for liability protection and portfolio management.

The Investor Progression: FHA → Conventional → DSCR

Many successful investors follow this path:

Stage 1: FHA House Hack (Properties 1–2) Buy a duplex or triplex with 3.5% down. Live in one unit for 12 months. This is your foundation—lowest cost of entry, best rates, and you learn landlording firsthand.

Stage 2: Conventional Loans (Properties 2–5) Once you move out of your FHA property, refinance into conventional to drop MIP. Use conventional loans for the next few investment properties. You'll need 20%–25% down but get competitive rates.

Stage 3: DSCR Loans (Properties 5+) When conventional lenders tighten up (higher reserves, tougher DTI scrutiny after 4+ mortgages), switch to DSCR. Each property qualifies on its own merits. No DTI limit, no property count limit.

This progression maximizes leverage early (FHA) and scalability later (DSCR).

Mortgage Insurance: The Hidden Cost of FHA

FHA mortgage insurance is a significant expense that's easy to underestimate.

Upfront MIP: 1.75% of the loan amount, typically rolled into the loan balance.

Annual MIP: 0.55% for most borrowers (loans over 15 years with LTV > 95%). This is divided by 12 and added to your monthly payment.

Duration: For loans with less than 10% down (which is most FHA borrowers), MIP lasts the entire life of the loan. You cannot cancel it. The only way to remove it is to refinance into a non-FHA loan.

On a $350,000 FHA loan:

• Upfront MIP: $6,125
• Annual MIP: $1,925/year ($160/month)
• Over 10 years before refinancing: $25,375 in total MIP costs

DSCR loans have no mortgage insurance, regardless of LTV.

Property Condition Requirements

FHA Minimum Property Standards

FHA requires the property to meet specific health, safety, and soundness standards:

• No peeling/chipping paint on pre-1978 homes (lead paint concern)
• Functional heating, plumbing, and electrical systems
• Adequate roof with at least 2 years of remaining life
• No evidence of termite damage or structural issues
• Working appliances if they convey
• Handrails on stairs
• Smoke detectors
• No standing water in crawlspace

If the appraisal flags any of these, repairs must be completed before closing—or the deal dies.

DSCR Property Requirements

DSCR lenders need the property to be in "financeable" condition, which is less strict than FHA:

• Must be habitable
• No major structural issues
• Must be insurable
• Must be rent-ready (or very close)

Cosmetic issues, minor deferred maintenance, and older systems generally don't kill a DSCR deal the way they might kill an FHA deal.

Frequently Asked Questions

Can I use an FHA loan to buy a pure investment property?

No. FHA requires owner-occupancy. You must live in the property as your primary residence. However, you can buy a 2–4 unit property with FHA, live in one unit, and rent the others.

Can I move out of my FHA property after 12 months and rent it?

Yes. Once you've satisfied the 12-month occupancy requirement, you can move out and rent your unit. At that point, the entire property becomes an investment. Many investors do exactly this.

Can I have an FHA loan and a DSCR loan at the same time?

Yes. You can have one FHA loan on your primary residence and separate DSCR loans on investment properties. They're completely different products from different types of lenders.

Is house hacking with FHA still worth it with high interest rates?

In most cases, yes. The 3.5% down payment and the ability to use rental income to offset your housing cost make FHA house hacking viable even in higher-rate environments. The key is buying in markets where rent-to-price ratios are healthy. Paying $1,000/month out of pocket to live in a duplex (while building equity) is still better than paying $2,000/month in rent with no equity.

What if the property needs work? Can I use FHA 203(k)?

Yes. The FHA 203(k) loan combines the purchase price and renovation costs into a single loan. This lets you buy properties that don't meet FHA standards in their current condition, as long as the renovations will bring them up to code. It's more complex and takes longer to close, but it's a viable path for distressed properties. DSCR loans don't offer a renovation component.

Which loan has better rates for a 2–4 unit property?

FHA rates are lower, but FHA charges MIP. When you factor in the annual MIP (~0.55%), the effective rate difference shrinks. For a duplex, FHA might be 6.5% + 0.55% MIP vs. DSCR at 7.75%. That's an effective gap of about 0.70%—which favors FHA, but only if you're willing to live in the property.

Can I refinance from FHA into a DSCR loan?

Yes. After you've moved out and the property is rented, you can refinance into a DSCR loan to drop the FHA mortgage insurance. Most investors do this once they have 12+ months of rental history and the property appraises favorably.

Do FHA loans work for short-term rentals?

FHA loans do not allow you to rent out the unit you occupy. If you buy a 2-unit with FHA, you can short-term rent the other unit (check local STR regulations). Once you move out after 12 months, you can STR all units. However, FHA underwriting only uses long-term rental income for qualification, not STR income.

The Bottom Line

FHA loans and DSCR loans aren't interchangeable—they serve different investors at different stages.

Choose FHA when:

• You're getting started and have limited cash
• You're willing to live in the property for at least a year
• You want the lowest possible down payment (3.5%)
• You're house hacking a 2–4 unit property
• Your credit score is below 620

Choose DSCR when:

• You're buying a pure investment property you won't live in
• You already have an FHA loan
• You're scaling a portfolio beyond a few properties
• You don't want to provide income documentation
• You want to close in an LLC
• You need a faster close without FHA appraisal hassles

The smartest move for many new investors: start with FHA to get in the game cheaply, then transition to DSCR as you scale. Contact HonestCasa to find out which loan fits your next deal.