Rates for DSCR loans are typically about one and a half to 2 percent higher than those for conventional investment loans. Let's explore why this is the case and whether a DSCR loan might be the right choice for you.

Why are DSCR rates higher than conventional loans?

DSCR loans are designed to measure the cash flow of an investment property in relation to its debt payments. The primary reason DSCR loan rates are higher is the increased risk to the lender. Unlike conventional loans, DSCR loans do not qualify the individual based on their personal debt-to-income ratio. This means that if tenants are not able to make rent payments, the lender is at a greater risk of the loan defaulting.

For example, with a conventional investment loan, the lender considers whether the individual can afford to make the housing payments even without rental income. DSCR loans, on the other hand, focus solely on the property's ability to generate enough income to cover the loan payments. Therefore, if the property experiences vacancies, the lender faces a higher risk, which is why the rates are higher.

The Benefits of DSCR Loans:

Despite the higher rates, DSCR loans offer several advantages for investors:

Faster Approval Process:

The process to get pre-approved for a DSCR loan is typically quicker, meaning you can secure your financing and close on your investment property faster.

Flexible Ownership Options:

DSCR loans can be placed in an LLC, providing additional flexibility and potential tax benefits.

Streamlined Qualification:

Since these loans are based on the property's cash flow rather than your personal income, the qualification process can be less stringent.

Each investment scenario is unique, and the best loan option for you will depend on your specific circumstances. If you meet the qualifications for a conventional investment property loan, that might be your best route due to the lower rates. However, if speed and ease of acquisition are higher priorities, a DSCR loan may be more advantageous.