Why Smart Investors Are Choosing DSCR Loans in 2026

Real Estate Finance Expert

DSCR stands for Debt Service Coverage Ratio. The core idea is simple: instead of qualifying you based on your personal income — your W-2s, your tax returns, your job history — the lender qualifies the property based on its own income. They divide the gross rental income by the total monthly debt payment on that property. If that number is 1.0 or higher, the property is covering its own debt. Most lenders want to see a ratio of 1.2 or above for the best terms, meaning the rent is twenty percent more than the mortgage payment.

Host

And that is a big deal for investors specifically. Can you walk us through a real comparison — what does qualifying look like under a conventional loan versus a DSCR loan?

Real Estate Finance Expert

Absolutely. Take a real example from a deal we closed last year. An investor wanted to buy a single-family rental in the Tampa market for four hundred and twenty thousand dollars. Under a conventional loan, the lender would look at his personal debt-to-income ratio. He already had a primary mortgage, two car loans, and three other investment properties. His DTI was sitting around fifty-two percent. Conventional lenders cap that at forty-three to forty-five percent in most cases. He was dead in the water using the traditional route. With DSCR, none of that mattered. The property was renting for two thousand six hundred a month. The proposed mortgage payment was nineteen hundred dollars. That gave him a DSCR of 1.37. Loan approved. He closed in twenty-two days.

Host

Twenty-two days. That is fast. Now I have to ask the obvious question — if DSCR loans are this powerful, why is not every investor using them? What is the catch?

Real Estate Finance Expert

The rate is typically higher. In early 2026, conventional investment property loans are pricing around seven to seven and a half percent for strong borrowers. DSCR loans are running closer to seven and a half to eight and a quarter percent depending on the lender, the property type, and your credit score. So there is a spread, usually between half a point and a full point. That is real money over time, which is why some investors assume DSCR is always the more expensive option. But that assumption is where the forty-seven thousand dollar story comes in.

Host

Okay, I have been waiting for this. Let's break down that number. How does an investor actually save forty-seven thousand dollars by switching to a DSCR loan?

Real Estate Finance Expert

So this investor had been doing conventional loans and every time she added a property, she had to show two years of rental income on her tax returns before a lender would count it toward qualifying. That meant a six to twelve month delay before she could buy her next property. She was essentially sitting on the sidelines waiting for her portfolio to season. In the time she was waiting, she missed two deals in Phoenix that appreciated roughly sixty thousand dollars combined in the following eighteen months. When we modeled what would have happened had she used DSCR from the start — buying on her timeline, not the lender's — the equity gain and rental income she would have captured exceeded the higher rate cost by forty-seven thousand dollars over five years. The rate looked more expensive. The outcome was dramatically cheaper.

Host

That reframes the whole conversation. It is not just about the rate — it is about what the delay costs you. Now you mentioned mistakes earlier. What are the three biggest mistakes investors make when they apply for DSCR loans?

Real Estate Finance Expert

Number one is using projected rent instead of market rent. Some investors pull numbers from a wishful underwriting model. Lenders use a third-party rent schedule, usually a form called the 1007, and if that appraisal comes in lower than what you projected, your DSCR drops and suddenly you need a bigger down payment or you do not qualify at all. Always run your numbers using conservative market comps before you go under contract. Number two is ignoring the impact of short-term rental income. If you plan to run a property on Airbnb or VRBO, many DSCR lenders will not count short-term rental history at all, or they will apply a vacancy haircut of thirty to forty percent to your gross revenue. Some lenders specialize in short-term rental DSCR products, and those are the ones you want if that is your strategy. Using the wrong lender for that product type is a very common and costly mistake. Number three is credit score timing. DSCR lenders have sharp pricing tiers at 740, 720, and 700. Dropping from a 742 to a 738 before closing because you opened a new credit card can move your rate by a quarter point. On a four hundred thousand dollar loan, that is roughly one thousand dollars a year. Do not touch your credit during the application process.

Host

Those are so specific and so avoidable. What does the broader market look like right now? You mentioned volume trends in 2025 and 2026 — are more people actually using these loans?

Real Estate Finance Expert

The growth has been remarkable. In 2022, DSCR loans represented roughly nine percent of all non-agency mortgage originations. By the end of 2025, that share had climbed to about twenty-three percent. We are talking about an estimated eighty billion dollars in DSCR originations in 2025 alone. Part of that is driven by the rate environment pushing investors out of conventional financing, but a bigger driver is education. Investors who scaled portfolios to ten, fifteen, twenty properties in the last three years largely did it through DSCR because it is the only product that does not penalize you for being a successful investor. Conventional loans get harder the more you own. DSCR loans do not care how many properties you have.

Host

So it scales with you. Now I want to play devil's advocate here because you mentioned a debate angle earlier. Is there ever a case where a conventional loan is simply the better choice?

Real Estate Finance Expert

Yes, and I think it is important to say this clearly. If you are buying your first investment property, you have a clean debt-to-income ratio, strong W-2 income, and the property cash flows conservatively, a conventional investment loan will almost always give you a lower rate. We are talking potentially a full point lower, and over thirty years that compounds significantly. DSCR earns its premium when your personal income profile creates friction — multiple properties, self-employment, depreciation that reduces your taxable income but makes lenders nervous. If none of those friction points exist, do not pay for a product you do not need. The smart investor knows which tool fits the job.

Host

I love that framing. So let's close with the actionable side. If someone is listening right now and they want to get the best possible rate on a DSCR loan, what do they do?

Real Estate Finance Expert

Three things. First, shop at least three DSCR lenders before you go under contract, not after. Rate spreads between lenders on the same deal can be as wide as three-quarters of a point right now. That is not a small difference. Second, maximize your DSCR ratio by putting the right lease in place before you apply. If the property is vacant or underrented, and you can get it to market rent before closing, do it. Even moving from a 1.1 to a 1.25 DSCR can unlock a better rate tier or a lower down payment requirement. Third, and this one surprises people — consider a buydown. On DSCR loans, a one-point buydown on a three hundred fifty thousand dollar loan costs thirty-five hundred dollars upfront and saves you roughly forty to fifty dollars a month. If you hold the property for more than six or seven years, you are ahead. Run the break-even math. It is usually worth it for long-term holds.

Host

Shop early, optimize your ratio, and do the buydown math. That is a checklist I am writing down right now. This has been genuinely eye-opening. Thank you so much for bringing the real numbers today.

Real Estate Finance Expert

My pleasure. The big takeaway is this: DSCR loans are not just a workaround for investors who cannot qualify conventionally. For the right investor and the right property, they are the most efficient path to scaling a portfolio. Know when to use them, and they will work for you.

Host

That is The Capital Playbook. If today's episode helped you think differently about how you finance your next deal, share it with one investor in your network who needs to hear it. We will be back next week with more of the strategies that actually move the needle. Until then, keep building.