DSCR Loans vs Hard Money Loans: Which Is Better for Real Estate Investors?

If you're buying an investment property and don't want to hand over two years of tax returns, you've probably landed on two options: DSCR loans and hard money loans. Both work for investors. Both skip the traditional income verification process. But they serve very different purposes, and picking the wrong one can cost you tens of thousands of dollars.

This guide breaks down exactly how DSCR loans and hard money loans differ—rates, terms, qualifications, and the scenarios where each one wins.

What Is a DSCR Loan?

A DSCR (Debt Service Coverage Ratio) loan is a long-term mortgage for investment properties that qualifies you based on the property's rental income rather than your personal income. The lender looks at one number: can the rent cover the mortgage payment?

The formula is simple:

DSCR = Monthly Rental Income ÷ Monthly Mortgage Payment (PITIA)

PITIA stands for Principal, Interest, Taxes, Insurance, and Association dues. If a property rents for $2,000/month and the full mortgage payment is $1,600/month, the DSCR is 1.25. Most lenders want a DSCR of 1.0 or higher, though some allow ratios as low as 0.75 with compensating factors like a larger down payment.

Typical DSCR Loan Terms in 2026

• Interest rates: 7.0%–8.5% (varies by DSCR ratio, credit score, and LTV)
• Loan terms: 30-year fixed, 5/6 ARM, 7/6 ARM, interest-only options
• LTV: Up to 80% (75% is more common for purchase)
• Minimum credit score: 620–680 depending on lender
• Prepayment penalties: Common (3-2-1 or 5-4-3-2-1 step-down)
• Closing timeline: 21–35 days
• Property types: 1–4 unit residential, condos, some allow 5–8 units

What Is a Hard Money Loan?

A hard money loan is a short-term, asset-based loan funded by private lenders or small lending companies. The lender cares primarily about the property's value—specifically, the after-repair value (ARV) if it's a fix-and-flip deal.

Hard money lenders move fast, close in days, and accept borrowers that banks won't touch. The trade-off is the cost: rates are significantly higher, and the loan term is measured in months, not years.

Typical Hard Money Loan Terms in 2026

• Interest rates: 10%–14%
• Points (origination fees): 2–4 points (each point = 1% of the loan amount)
• Loan terms: 6–18 months
• LTV: Up to 70% of ARV for fix-and-flip; up to 65% of as-is value
• Minimum credit score: Some lenders go as low as 550; many don't check credit at all
• Prepayment penalties: Rare (most allow early payoff with no fee)
• Closing timeline: 3–10 days
• Property types: Almost anything—residential, commercial, land, mixed-use

Side-by-Side Comparison

When to Use a DSCR Loan

1. You're Buying a Rental Property to Hold Long-Term

This is the bread and butter of DSCR lending. You find a property that's already in rentable condition—or close to it—and you want a 30-year mortgage based on the rent, not your W-2.

A DSCR loan at 7.5% on a $300,000 property costs you roughly $1,678/month in principal and interest. Hold that for 30 years and you've paid about $304,000 in total interest.

A hard money loan at 12% on the same property costs $3,000/month in interest alone—and you'd need to refinance or sell within a year.

2. You Own Multiple Rental Properties

DSCR lenders don't penalize you for owning 10, 15, or 20 financed properties. Conventional lenders cap you at 10 mortgages. Hard money lenders don't care about your portfolio size either, but you can't hold hard money debt long-term across a portfolio. The payments would eat you alive.

3. You're Self-Employed or Have Complex Income

If your tax returns show low income because of write-offs, a DSCR loan sidesteps the problem entirely. The lender never asks about your personal income. Hard money does the same, but again—short-term only.

4. The Property Is Already Stabilized

If the property has a tenant in place and a lease on file, DSCR lenders love that. They can use the actual lease amount (not just market rent) to calculate the ratio. No rehab needed, no construction draws, no uncertainty.

When to Use a Hard Money Loan

1. You're Flipping a Property

Hard money was built for flips. You buy a distressed property at a discount, use the lender's rehab draws to renovate, then sell within 6–12 months. The high interest rate doesn't matter much when you're holding the property for 4 months and clearing $40,000–$80,000 on the sale.

Example: You buy a property for $200,000, put $50,000 into rehab, and sell for $320,000. Even at 12% interest plus 3 points, your total borrowing cost for 6 months is roughly $18,000. The profit still works.

2. You Need to Close in Days, Not Weeks

Sometimes a deal won't wait. Foreclosure auctions, estate sales, and off-market deals from distressed sellers often need a fast close. Hard money lenders can fund in 3–7 days. DSCR lenders need 3–5 weeks minimum for appraisal, title, and underwriting.

3. The Property Doesn't Qualify for Long-Term Financing

DSCR lenders need the property to be in livable condition (or very close to it). If the roof is caved in, there's no working HVAC, or the property is listed as uninhabitable, a DSCR lender will decline. Hard money lenders will fund it as long as the numbers work on the back end.

4. Your Credit Is Below 620

Most DSCR lenders require a 620 minimum FICO score. Many want 680+. Hard money lenders are more flexible—some don't even pull credit. If you've had a recent bankruptcy, foreclosure, or collection, hard money may be your only non-cash option.

5. You Need Rehab Funds Built into the Loan

Hard money loans commonly include a rehab draw schedule: the lender sets aside funds for renovation and releases them in stages as work is completed. DSCR loans don't offer construction or rehab draws. The property needs to be in financeable condition from day one.

The BRRRR Strategy: Where Both Loans Work Together

The BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) is where hard money and DSCR loans form a one-two punch.

Step 1: Buy and Rehab with Hard Money You acquire a distressed property with a hard money loan. The lender funds the purchase and rehab. Total timeline: 3–6 months.

Step 2: Rent the Property Once renovations are done, you place a tenant and collect rent. This stabilizes the property and generates the income a DSCR lender needs.

Step 3: Refinance into a DSCR Loan After the property has been rented for 1–3 months (some lenders require a 6-month seasoning period), you refinance the hard money loan into a 30-year DSCR loan. Your rate drops from 12% to 7.5%, your monthly payment drops by half, and you pull out your rehab capital to do it again.

This is the most common way experienced investors combine these two products. The hard money loan is the acquisition tool. The DSCR loan is the permanent financing.

Cost Comparison: Real Numbers

Let's look at a specific scenario to compare costs.

Property: Single-family rental, purchase price $250,000, appraised value $250,000, market rent $2,100/month.

DSCR Loan Scenario

• Loan amount: $187,500 (75% LTV)
• Rate: 7.5%, 30-year fixed
• Monthly P&I: $1,311
• Taxes + insurance + HOA: $450/month
• Total PITIA: $1,761
• DSCR: $2,100 ÷ $1,761 = 1.19 ✓
• Origination: 1% = $1,875
• Year 1 total cost: $1,875 + ($1,761 × 12) = $23,007

Hard Money Loan Scenario

• Loan amount: $175,000 (70% LTV)
• Rate: 12%, interest-only, 12-month term
• Monthly interest: $1,750
• Origination: 3 points = $5,250
• Year 1 total cost: $5,250 + ($1,750 × 12) = $26,250
• And you still need to refinance or sell at the end

The DSCR loan saves $3,243 in year one alone—and it's permanent financing. The hard money loan requires you to exit within 12 months and pay new closing costs on whatever you refinance into.

Common Mistakes Investors Make

Mistake 1: Using Hard Money for a Buy-and-Hold

If you plan to keep the property, don't start with hard money unless the property needs significant rehab. The interest alone will drain your cash reserves, and if the refinance takes longer than expected, you're paying 12% on money that should cost 7.5%.

Mistake 2: Assuming Hard Money Is "Easier" to Get

Hard money has lower credit requirements, but lenders still evaluate the deal. If the ARV doesn't support the loan, or if you have no experience and no skin in the game, experienced hard money lenders will pass. It's not free money.

Mistake 3: Ignoring Prepayment Penalties on DSCR Loans

Most DSCR loans have 3- or 5-year prepayment penalties. If you sell the property in year 2, you might owe 2%–3% of the loan balance. Factor this into your exit strategy. If there's any chance you'll sell within 3 years, negotiate for a shorter penalty or pay for a no-prepay option (usually 0.25%–0.50% higher rate).

Mistake 4: Not Shopping Hard Money Lenders

Hard money rates and terms vary wildly. One lender charges 12% + 2 points; another charges 10% + 3 points. The total cost matters more than the headline rate. Always calculate the total borrowing cost for your expected hold period.

Frequently Asked Questions

Can I use a DSCR loan for a fix-and-flip?

No. DSCR loans are designed for stabilized rental properties. The property must be in livable condition and generating (or able to generate) rental income. Flips require short-term financing like hard money.

Do hard money lenders require an appraisal?

Most do, but it's usually a faster, less formal process than a DSCR or conventional appraisal. Some hard money lenders use BPOs (broker price opinions) or desktop valuations to speed things up.

Can I refinance a hard money loan into a DSCR loan?

Yes, and this is extremely common—especially in the BRRRR strategy. Most DSCR lenders require the property to be stabilized with a tenant in place. Some require a 3–6 month seasoning period from the date you acquired the property.

Which loan type has faster closings?

Hard money, by a wide margin. Most hard money loans close in 3–10 business days. DSCR loans typically take 21–35 days because they require a full appraisal, title work, and more thorough underwriting.

Is a DSCR loan the same as a non-QM loan?

DSCR loans are a type of non-QM (non-qualified mortgage) loan. Non-QM is a broad category that also includes bank statement loans, asset depletion loans, and others. All DSCR loans are non-QM, but not all non-QM loans are DSCR.

Can I get a hard money loan with bad credit?

In many cases, yes. Hard money lenders focus on the deal, not your credit history. Some don't pull credit at all. However, you may face higher rates or need a larger down payment if your credit is below 600.

What happens if I can't refinance out of a hard money loan in time?

You'll need to request an extension (most lenders offer 3–6 month extensions for an additional fee of 0.5%–1%) or find a new exit strategy. If you default, the lender can foreclose. This is the biggest risk of hard money—it's a ticking clock.

The Bottom Line

DSCR loans and hard money loans aren't competitors. They're different tools for different jobs.

Use a DSCR loan when:

• You're buying a stabilized rental property
• You want a 30-year mortgage at reasonable rates
• You don't want to provide personal income documentation
• You're building a long-term portfolio

Use a hard money loan when:

• You're flipping a property
• You need to close in under two weeks
• The property needs major rehab before it's financeable
• You have poor credit and no other options

Use both when:

• You're executing a BRRRR strategy—hard money to acquire and rehab, DSCR to hold for the long run

The best investors understand both products and know when to deploy each one. If you're ready to finance your next rental property with a DSCR loan, get a quote from HonestCasa today and see what rate you qualify for.