DSCR vs. Conventional Mortgage: Which One Is Best for You?

Choosing the right mortgage is one of the most important decisions you’ll make when buying a home or property. In the U.S., the average home price in 2024 is about $416,000, and with mortgage rates hovering around 7%, it’s essential to understand which mortgage option is best for you. Two of the most common types of loans in the housing market are DSCR mortgages and conventional mortgages. In this blog, we will explain the difference between these two types of mortgages and help you decide which one suits your needs based on your financial situation and goals.

What Is a Mortgage?

A mortgage is a loan used to buy a house or property. Since most people can’t afford to pay for a home upfront, they borrow money from a lender, like a bank. In the U.S., mortgages allow people to make monthly payments over a long period, usually 15 to 30 years. In 2023, the total mortgage market in the U.S. was worth more than $12 trillion, showing how important mortgages are for most people.

Each month, a portion of the payment goes toward the loan, and the rest covers the interest, which is the cost of borrowing money. Because home prices in the U.S. have been rising, with an 8% increase over the past two years, mortgages are necessary for most people who want to buy a home.

What Is a DSCR Mortgage?

A DSCR mortgage stands for Debt Service Coverage Ratio mortgage. This type of mortgage is used by real estate investors, not homebuyers. Instead of looking at your personal income to approve the loan, the lender looks at how much income the property itself makes. This means the rent your property generates will be the main factor in whether you qualify for the loan.

How Does a DSCR Mortgage Work?

• Income-Based: The lender looks at how much income the property generates. For example, if your rental property earns $4,000 a month and your loan payment is $3,500, the loan will be approved if the property’s income is enough to cover the cost.
• Debt Service Coverage Ratio (DSCR): The DSCR is calculated by dividing the income from the property by the loan payment. In this example, the DSCR is 1.14 (4,000 ÷ 3,500). A DSCR of 1.0 means the property just covers the loan payment, but anything higher means the property makes extra money.

Benefits of a DSCR Mortgage:

1. Easy Approval for Investors: If you’re an investor, you don’t need to show your personal income or credit score to get approved.
2. Focus on Property Income: This mortgage focuses on how much the property earns, not your salary.
3. Less Paperwork: Since DSCR loans focus on rental income, there is usually less paperwork required compared to conventional loans.

What Is a Conventional Mortgage?

A conventional mortgage is the most common type of loan in the U.S. It’s for people who want to buy a home to live in, not for investment purposes. This loan is based on your personal income, credit score, and job history. The lender wants to know that you can repay the loan based on your financial situation.

How Does a Conventional Mortgage Work?

• Income-Based: The lender will check your income, credit score, and other factors to see if you qualify. A good credit score (usually 620 or higher) and a stable job will help you get a better interest rate.
• Lower Interest Rates: If you qualify for a conventional mortgage, you can often get a lower interest rate compared to other types of loans.

Benefits of a Conventional Mortgage:

1. Lower Interest Rates: Conventional mortgages typically have lower interest rates for people with strong credit scores.
2. More Predictable Payments: You can choose between a fixed-rate mortgage, which has the same interest rate for the life of the loan, or an adjustable-rate mortgage, where the rate can change.
3. Common Choice for Homebuyers: Conventional loans are the most popular choice for buying a home in the U.S.

Key Differences Between DSCR and Conventional Mortgages

Feature	DSCR Mortgage	Conventional Mortgage
Qualification	Based on property income	Based on personal income and credit score
Best For	Real estate investors	Homebuyers looking to buy a primary home
Documentation	Minimal (proof of rental income)	Extensive (pay stubs, tax returns, etc.)
Interest Rates	Higher than conventional mortgages	Lower for those with good credit
Purpose	Rental or investment properties	Primary homes or second homes

Why Choose a DSCR Mortgage?

A DSCR mortgage is great for real estate investors. It allows you to buy more properties without needing to rely on personal income or credit score. Let’s look at some reasons why a DSCR mortgage might be the right choice for you:

Benefits of DSCR Mortgages:

1. Based on Property Income: You can use rental income to qualify for more loans, even if your personal income isn’t very high.
2. No Personal Income Needed: Lenders don’t check your salary, so if your property is making enough money, you can still qualify.
3. Quick Approval: With fewer documents to provide, DSCR loans are usually processed faster.

Example:

Let’s say you own a rental property that makes $3,000 each month. Your loan payment is $2,500. The DSCR is 1.2 (3,000 ÷ 2,500), which means the property makes more than enough money to cover the loan. You can use the income from this property to help qualify for another loan to buy more properties.

Why Choose a Conventional Mortgage?

A conventional mortgage is ideal for people who want to buy a home to live in. It’s based on your personal financial situation, so it’s a good option for first-time homebuyers or anyone who has a stable income and a decent credit score.

Benefits of Conventional Mortgages:

1. Lower Interest Rates: If you have a strong credit score and a stable income, you can often get a lower interest rate.
2. Predictable Monthly Payments: A fixed-rate mortgage ensures your payments will stay the same throughout the loan term.
3. Flexible Loan Terms: Conventional loans offer both short- and long-term options, giving you flexibility depending on your financial goals.

Example:

Let’s say you’re a first-time homebuyer with a good credit score of 750. With a conventional mortgage, you could secure a low interest rate, making your monthly payments more affordable and saving you money over the life of the loan.

Trends in the U.S. Housing Market in 2024

The U.S. housing market is currently facing some challenges, but also presents opportunities for both homebuyers and investors. In 2024, average home prices are expected to stay high, around $416,000, making it harder for first-time buyers to afford homes. At the same time, mortgage rates have increased from 3% in 2020 to about 7% in 2024, raising the cost of home loans.

Key Market Trends:

1. Rising Home Prices: Home prices have increased by more than 8% in the past two years, making it harder for homebuyers to find affordable homes.
2. Higher Mortgage Rates: As interest rates rise, monthly mortgage payments become more expensive.
3. More Investors Using DSCR Loans: With high property prices, more real estate investors are using DSCR mortgages to grow their portfolios since these loans rely on rental income, not personal income.

When Should You Use a DSCR Mortgage?

You should consider a DSCR mortgage if you’re a real estate investor or someone looking to buy rental properties. This loan type is ideal for people who want to use the income from their properties to qualify for more loans.

When to Choose DSCR:

• You are buying rental properties.
• You want to grow your real estate portfolio.
• You don’t rely on personal income to qualify.

Example:

An investor who owns several rental properties generating a combined $10,000 per month in rent could use this income to qualify for additional loans to buy more properties, even if their personal income is low.

When Should You Use a Conventional Mortgage?

A conventional mortgage is the right choice if you’re a first-time homebuyer or someone looking to buy a home for yourself or your family. This loan type is based on your personal income and credit score, so it’s perfect for those with a stable financial background.

When to Choose Conventional:

• You are buying a home to live in.
• You have a stable income and good credit.
• You want lower interest rates and predictable monthly payments.

Example:

If you have a steady job and a credit score of 720, you might qualify for a low-interest conventional mortgage to buy a home for your family.

Conclusion

Choosing between a DSCR mortgage and a conventional mortgage depends on your goals. A DSCR mortgage is best for real estate investors who want to use rental income to qualify for loans, while a conventional mortgage is great for homebuyers who want a stable loan with lower interest rates. At OLLender, we are here to help you choose the best mortgage for your needs, whether you’re an investor or a first-time homebuyer. By understanding your financial situation and goals, you can make the right choice and secure the best mortgage option for you.

Register for a free quote today with OLLender and take the first step toward securing the perfect mortgage for your future.