DSCR Loan vs Hard Money Loan: Which Is the Better Option for You?

8 easy ways to learn whether you need a DSCR loan vs hard money loan for your real estate investment.

If you’re new to real estate investing, you’ve got to start somewhere.

Many of the hundreds of calls we get every month ask a simple question: “What’s the difference between loans? Which is right for me?”

You may not know the difference between a hard money loan and a DSCR loan – more importantly, you may not know which one is right for your deal.

Let’s go through the differences between a DSCR loan vs hard money loan and talk about when each one may be right for you.

What Is a DSCR Loan vs Hard Money Loan?

Firstly, let’s give a brief overview of each type of loan.

A DSCR loan, also known as a debt service coverage ratio loan, is a long-term loan for rental properties. This type of loan is based on the income (rent) to expenses ratio on a property.

A hard money loan, on the other hand, is a short-term loan typically used for flipping houses. This type of loan is often based on the ARV of an under-market property.

Both loan types are designed with real estate investors in mind. Now, let’s break down a DSCR loan vs hard money loan so you can make an informed decision about your investments.

1. Term Length: Short-Term or Long-Term

One key difference between a DSCR loan vs hard money loan is the length of the loan term. 

DSCR loans are long-term, while hard money loans are short-term. This means if you’re looking to buy a rental property and hold it for years, a DSCR loan may be the better option. On the other hand, if you’re planning to flip a house quickly, a hard money loan would make more sense.

2. Credit: Requirements for a DSCR Loan vs Hard Money Loan

Credit is another important factor for distinguishing the right loan for you.

There are two credit paths with hard money lenders. Local lenders generally don’t care about credit score. They only check your credit report to see if you have any bankruptcies or other major red flags. National hard money lenders, however, almost always take your credit score into account.

Credit for a DSCR loan is also a must. The higher your credit score, the better your terms (including a lower down payment and better rates).

3. Income: Personal or Business Income Requirements

Income is another important consideration.

Hard money lenders don’t check income, so it doesn’t matter what’s on your tax returns or your W-2s.

DSCR lenders also have no requirements about your personal or business income. However, they do require the property to have rental income.

4. Loan-to-Value: How Much Money You Can Get

Loan to value is another factor that distinguishes these two types of loans.

In this market, at the end of 2022, hard money lenders may lend up to 90% of the purchase price and 100% of the rehab costs. Meanwhile, DSCR lenders may lend up to 80% of the as-is value of a rental-ready property.

5. Rehab Costs: DSCR Loan vs Hard Money Loan for a Fix

Which of these two loans will help you with rehab costs?

This is the hard money lender’s niche. Most hard money will cover the rehab of a property 100%.

DSCR loans, though, do not cover any rehab costs. This means you’ll need to purchase a property that is already in rentable condition if you’re planning to use a DSCR loan.

6. Experience: What You Need To Know

How many flips, BRRRRs, or other real estate projects have you done? Experience is a factor that will change how a lender looks at you.

Neither DSCR or hard money lenders would deny you a loan based on lack of experience. However, both types of lenders may require more money down.

7. Property Types: What You Can Get with a DSCR Loan vs Hard Money Loan

The type of property you can buy with the loan is also a key difference here.

Hard money lenders will lend on almost any type of real estate – from land to commercial buildings to flips.

DSCR loans, on the other hand, are only available for one type of property. This is a rental-ready unit, such as single family homes, duplexes, fourplexes, or anything that generates an income.

8. Rates: Interest Rates for a DSCR Loan vs Hard Money Loan

Finally, let’s talk about rates. These are vital to your cash flow and profit on any real estate investment. Interest rates vary widely depending on market conditions. Let’s look at where they sit right now, at the end of 2022, into 2023.

Hard money loans are ranging from 9.5% to 12%, while DSCR loans have rates between 6.5% to 9.5%. Your exact interest rate will depend on your credit score and experience.

How to Get These Real Estate Investment Loans

If you’re curious which type of loan is right for you, try this free DSCR calculator, or download this loan optimizer to compare hard money loans.

You can also email us at Info@HardMoneyMike.com with any questions. We’d love to hear from you, help you understand real estate investing, or talk about a loan.

Happy Investing.