In this post, we're looking at DSCR loans, which we think is one of the best alternatives to hard money loans.
Need a Better Alternative to Hard Money?
A DSCR loan can offer lower rates and better terms for real estate investors. Find out how to qualify today!
What's a hard money loan?
A hard money loan is a loan secured by a property. There are plenty of good things about them. They close quickly — we're talking five to seven days, maybe even three in some scenarios. Very little underwriting is needed. The downsides are that they have high interest rates, typically 12% or more and they require a lot of equity in the home. Sometimes, you can find a hard money lender with a 20% down minimum, but most times it's around 40% or 50%. These loans are not good for longer term investors, but they're great for people who move quickly.
Hard Money Pros
- Quick closings (possible in less than 7 days)
- Very little underwriting
Hard Money Cons
- High interest rates (typically 12% or more)
- High fees
- Lots of home equity required
- Bad for long term investors
Thankfully, we've got an alternative.
The DSCR loan as an alternative to hard money
DSCR stands for Debt Service Coverage Ratio. A DSCR loan allows you to take a loan out on an investment property based on the appraised cash flow that it might generate, as opposed to your income.
Your debt service coverage ratio is calculated by taking your gross rent income and dividing it by the principal, interest, taxes, and insurance (PITI) payment. As an equation that looks like this:
DSCR = Gross Rent Income ÷ PITI
So, let's say your rent was $2500 and your total PITI payment is $3000. Your DSCR, in this example, would be calculated as follows:
$2,500 ÷ $3,000 = 0.83
This gives you a DSCR ratio of 0.83, and as long as your DSCR ratio is greater than 0.75, here in Maricopa County, you're eligible for this program.
Pros of DSCR loans
With this program, we're basically allowing you to get 100% credit for your rent. DSCR loans have lower rates and fees than hard money, and down payments can be as low as 20%. It can be used on purchases and cash-out refinances. But the really great thing is that there's no lease needed. We use the market rent from the appraisal where we order a credit market analysis where an appraiser looks around at comp sales and rentals, so there's no personal income needed, there's no need for your tax returns or pay stubs, and we don't need proof of your employment. Gifts are allowed for down payments, and you can get a loan of up to $3.5 million. Plus, the minimum credit score is only 620.
The DSCR Pros at a Glance:
- Lower Rates and Lower Fees than Hard Money
- Down payment as low at 20% down
- Purchase and Cash-out Refinances allowed
- Bank will give you 100% credit for your Rent
- No lease is needed. We can use Market Rent from appraisal
- No Personal Income documentation is needed
- No Tax returns needed
- No paystubs needed
- No employment needed
- Gifts are allowed for Down Payment subject to terms
- Loan amounts up to $3.5 million
- Minimum credit score is 620
Cons of DSCR loan
This is sort of the opposite of hard money in the sense that you can't pay this loan off for six months and it is only for investment properties. It's not for second homes. And the home will need to remain in a livable condition. It can't be gutted, but it's perfect if you're planning on renting it out, for example.
The DSCR Cons at a Glance:
- Cannot be paid off before 6 months
- Investment Properties only
- Home will need to be in livable condition
Who is the DSCR loan perfect for?
The DSCR loan is perfect for:
- Investors who don't want to provide employment info (tax returns, pay stubs, W2s, etc.)
- Investors who are looking to buy and flip (as long as payoff does not occur before 6 months from loan closing)
- Investors who are looking to buy and hold properties
The DSCR loan is perfect for investors who do not want to provide employment information, tax returns, paystubs, W2s, etc; for investors who are looking to buy and flip properties, as long as payoff does not occur before six months from loan closing; and, investors who are looking to buy and hold properties. It's a classic for self-employed borrowers who have very complex incomes who are looking to get an investment property, since it solves the problem of having to deal with complex income reporting. It can also be great if you have a bunch of investment properties and say you've maxed out on the conventional loan limit of ten, the DSCR loan is a perfect option.
Get in touch
If you'd like to get a DSCR loan, or if you have any questions about anything mortgage related, don't hesitate to reach out.
You can give us a call at +1 602-535-2171 or shoot us an email at team@AZmortgagebrothers.com. Be sure to ask us for a free quote on your next mortgage. We'll be sure to give you personalized service and help you through the whole process.
•••
Be sure to ask us for a free quote on your next mortgage. We'll personally work with you and help you through the whole process.
Interested in alternative lending options? Discover why a DSCR loan may be ideal, and don't miss our guides on handling employment gaps, exploring credit card payoff, weighing the pros and cons of couple vs single applications, tips on relocating while working remotely, and learning how a rapid rescore can boost your qualification.
Mortgage Brothers LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Mortgage Brothers NMLS 1007154, NMLS #210917 and 1618695. Equal Housing Opportunity.
Transcript of the Mortgage Brothers Podcast
What You Need to Know About Investment Rental Mortgages with DSCR Home Loans
Introduction [00:00]
I'm Eddie Knoell, and I'm Tom Knoell. Welcome, everyone, to the Mortgage Brothers Podcast Show! Today, we're talking about an alternative to hard money loans: DSCR—Debt Service Coverage Ratio loans.
Before we get started, just a reminder: this is for informational purposes only and not financial advice. Also, if you find this helpful, be sure to subscribe, like, and comment below!
What Is Hard Money Lending? [01:08]
Many investors are familiar with hard money loans. These loans provide quick closings—sometimes in as little as 5 to 7 days, or even 3 days in some cases. They require minimal underwriting, making them a go-to option for fast transactions.
But hard money loans have significant downsides:
- High interest rates (often 12% or more)
- High fees and points
- Strict equity requirements (some lenders require 40% to 50% down)
These loans are not ideal for long-term investors. They work best for short-term situations, like flipping a property quickly. Investors who need to move fast and don't mind paying extra for speed typically use hard money.
What Is a DSCR Loan? [02:39]
DSCR (Debt Service Coverage Ratio) loans offer a better alternative to hard money. These loans focus on the property's cash flow rather than the borrower's personal income.
DSCR is calculated by dividing gross rent income by principal, interest, taxes, and insurance (PITI).
Example:
- Monthly rent: $2,500
- PITI payment: $3,000
- DSCR ratio: 2,500 ÷ 3,000 = 0.83
Most DSCR loan programs require a ratio above 0.75, making them a flexible option for investors.
Advantages of DSCR Loans Over Hard Money [04:09]
Unlike hard money, DSCR loans have lower rates and lower fees. Here are the key benefits:
- Interest rates are much lower than hard money loans
- Lower fees and points
- Down payments as low as 20%
- No personal income verification required
- No tax returns, W-2s, or pay stubs needed
- No lease agreements required (appraisers use market rent analysis)
- Loan amounts up to $3.5 million
- Gift funds allowed for down payments—something conventional loans don't allow for investment properties
If you already have a hard money loan, you can refinance into a DSCR loan to get out of high interest rates. Many investors use hard money to buy a foreclosure and then refinance with a DSCR loan for long-term financing.
One of the biggest advantages is that lenders don't require a lease agreement. Instead, appraisers determine rental value based on market comps—so even if the property isn't rented yet, you can still qualify.
DSCR Loan Requirements [06:28]
To qualify, you must:
- Have a DSCR ratio of at least 0.75
- Have a credit score of 620+ (higher scores get better rates)
- Be purchasing an investment property (not a primary or second home)
- Buy a property in livable condition (no major renovations needed)
However, there are a few restrictions:
- Prepayment penalties apply if you pay off the loan within 6 months
- Vacation homes are not eligible (only investment properties)
This means you can't use a DSCR loan for a cabin in Flagstaff or a vacation rental in Sedona unless it's strictly an investment property.
Who Are DSCR Loans Best For? [08:25]
These loans are perfect for investors who:
- Don't want to provide personal income documentation
- Are self-employed, 1099 workers, or have complex tax returns
- Need to refinance out of a hard money loan
- Want to buy and hold rental properties
DSCR loans are especially useful for high-net-worth individuals with unconventional income streams, such as attorneys transitioning to partnership status or entrepreneurs with fluctuating earnings.
For long-term investors, it's important to compare DSCR loans with conventional financing. If your personal income is easy to document, Fannie Mae or Freddie Mac loans might be a better fit—but DSCR loans provide more flexibility.
Even if you already own multiple investment properties, DSCR loans have no limit on the number of financed properties—unlike conventional loans, which cap at 10 properties.
How to Get Started [11:02]
If you're an investor looking for a smarter alternative to hard money, DSCR loans might be the solution.
To get a free consultation, contact the Mortgage Brothers Team. You can find our phone number and contact form in the description. We're based in Phoenix, Arizona, and specialize in helping investors navigate the mortgage process.
Thanks for listening! If you found this information helpful, like, comment, and subscribe to the Mortgage Brothers Podcast for more expert mortgage advice.