Investor loans 101: DSCR, portfolio, and hard money

Real estate investors hit the same wall sooner or later. The tax returns that make your accountant happy, with all those rental depreciation and expense write-offs, make it harder to qualify for the next conventional loan.

The good news: there's more than one way to finance a rental.

1. Conventional investment loans

This is where most investors start. It qualifies you on your personal income, like a regular mortgage.

• Down payment: typically 15% for a single-family rental, 25% for 2 to 4 units
• Rates: usually the lowest available for investment property, but higher than a primary residence
• Documentation: full income, tax returns and reserves
• Limit: there's a cap on how many financed properties you can have

If you qualify, conventional is usually the cheapest money. Start here.

2. DSCR loans: the property qualifies

A DSCR (debt service coverage ratio) loan doesn't look at your personal income at all. It looks at whether the property's rent covers its own payment.

The trade-offs: DSCR rates are higher than conventional, down payments usually start around 20% to 25%, and many loans include a prepayment penalty for the first few years. Read that section carefully.

Best for: self-employed investors, people scaling past the conventional limit, and anyone whose tax returns understate their real cash flow.

3. Portfolio loans

Portfolio loans are held by the lender rather than sold. That gives the lender flexibility on unusual properties, mixed-use buildings, or borrowers with complicated situations. Terms vary widely. Some are excellent, some are expensive. Always compare them against DSCR and conventional options.

4. Hard money: short-term only

Hard money loans are short-term loans, often 6 to 18 months, based mostly on the property's value. They're common for fix-and-flip projects and for buying a property that won't qualify for regular financing yet.

• Fast to close, sometimes in days
• Much higher interest rates and upfront points
• Meant to be replaced quickly, by selling or refinancing

Hard money is a bridge, not a destination. Before you take one, know exactly how you're getting off it.

The one most investors overlook: house hacking

If you'll live in one unit, you can buy a 2 to 4 unit property with an owner-occupied loan. With FHA, that can mean 3.5% down, and part of the rent from the other units can help you qualify. It's one of the lowest-cost ways to start investing. You do have to genuinely live there.

How I match the loan to the deal

1. Can you qualify conventionally? If yes, that's usually the best price.
2. If not, does the rent support a DSCR loan at a ratio that gets good pricing?
3. Is the property in rentable condition today? If not, you may need short-term financing first.
4. What's your exit? Hold for 10 years, refinance after renovations, or sell?

The loan should fit your strategy, not the other way around.

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Figures in this article are illustrative examples, not rate quotes. Your actual rate, mortgage insurance and costs depend on your credit, down payment, property and loan program. This is not a commitment to lend. All loans subject to credit approval and underwriting guidelines. Rates and terms are subject to change without notice.