- Attractive Interest Rates
- Flexible Qualifications
- Low Down Payments
Loan Options For Investment Properties
When exploring financing options for investment properties, it’s important to compare different loan products not just on their interest rates and terms but also on their underwriting guidelines, loan requirements and who each loan type is right for.
Three common pathways for financing investment properties include DSCR (Debt Service Coverage Ratio) loans, Fix and Flip loans, and FHA loans.
Each loan type caters to specific investor needs and has unique strengths and limitations. Below is an in-depth look at each, including loan eligibility, and practical applications of each loan type.
DSCR (Debt Service Coverage Ratio) Loans
A DSCR loan is specifically structured for real estate investors who rely on rental income to repay their loans. Rather than using a borrower’s personal income to qualify, lenders evaluate whether rental income will cover PITIA (including principal, interest, property taxes, insurance and HOA fees).
Typically, lenders look for a DSCR of at least 1.2, meaning the monthly rental income should exceed the monthly debt service by at least 20%.
Where DSCR loans differ from conventional or FHA financing is in the underwriting. DSCR lenders often place less emphasis on personal credit scores (though they still factor into the interest rate pricing) and more emphasis on the property’s income-generating capacity.
This makes DSCR loans ideal for full-time investors or those with fluctuating personal incomes, such as self-employed individuals and those who can demonstrate a successful rented property.
DSCR loans typically offer loan-to-value (LTV) ratios ranging from 75% to 80%, which is competitive for an investment product. However, interest rates tend to be higher than those associated with FHA or conventional loans because these types of loans are considered higher risk (they often do not rely on the borrower’s W-2 or self-employed income but on rent).
The higher interest rates are due to more flexible underwriting guidelines and investment properties carrying more risk of default than owner-occupied properties.
When to Use DSCR Loans vs. FHA Loans
Use DSCR loans if:
- You have multiple investment properties and want to qualify based on rental income.
- You do not meet standard FHA or conventional DTI (debt-to-income) ratios due to inconsistent personal income.
- You aim to expand your real estate portfolio quickly and prefer flexible underwriting guidelines.
Use FHA loans if:
- You plan to occupy the property yourself (FHA requires owner occupancy).
- You prefer a lower down payment (3.5%)
- You have a relatively straightforward W-2 income
Fix and Flip Loans
A fix-and-flip loan is a short-term financing solution designed for investors who purchase distressed or undervalued properties, renovate them, and sell them for a profit, usually within 6 to 18 months. Lenders of fix and flip loans focus on the “after-repair value” (ARV) to determine how much they are willing to lend. Lenders finance a percentage of both the purchase price and the renovation costs, expecting the investor to exit the loan once the property is sold.
Because these loans are relatively short-term and considered riskier, interest rates tend to be higher, often in the range of 8% to 15%. Also, origination fees are higher, ranging from 1% to 5% of the loan amount.
Fix and flip lenders can close in as little as 3 days. Like DSCR, underwriting will focus on the deal, rather than personal income. Experienced borrowers receive better terms, including higher LTV and lower rates.
When to Use Fix and Flip Loans vs. FHA Loans
Use Fix and Flip loans if:
- You are purchasing a property that would not qualify for FHA financing because of significant property damage or code violations.
- You have a clear strategy to rehab and sell within 3-6 months.
- You prefer quick access to funds with no personal income documentation.
Use FHA loans if:
- You intend to occupy the property as your primary residence, even if you’re planning some cosmetic renovations using FHA’s 203(k) program.
- You need a long-term, lower-interest mortgage rather than short-term financing.
Choosing the right financing tool for an investment property depends on the borrower’s investment strategy, property condition, and if you are occupying the property. DSCR loans cater to those who wish to acquire and hold rental properties without using personal income, while fix and flip loans fit investors trying to capitalize on fast renovations and flipping.
Although versatile for some multi-unit investment scenarios, FHA loans are primarily oriented toward owner-occupants and long-term homeownership. By pinpointing your investment strategy, long-term rental income or quick rehabs for fast turnover, you can decide whether a DSCR or Fix and Flip loan is more suitable than an FHA mortgage.
FHA Loans Help Make Home Ownership
Possible For a Wider Range of People.
An FHA Loan Specialist Ready To Help You
Our FHA Loan Specialists are always available to help you and answer any questions. You may contact a dedicated FHA Loan Specialist through our website or by calling us directly. You may also chat with us to get a quick answer to your questions.
We Make The FHA Loan Process Quick & Easy
Lenders often times will steer their clients away from an FHA loan due to their inexperience with the program. FHA Loans are a great source of funding for our clients. We share our knowledge and experience with FHA loans, making it easier for borrowers.
FHA Approved Lender
The Federal Housing Administration requires lenders offering FHA loans to go through an extensive approval process. We are FHA-approved and designated as a “Full Eagle” FHA mortgage lender offering FHA-insured home loans in Texas.
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