What is the downside to a DSCR loan?

Cost and prepayment penalties. DSCR rates run roughly 0.75 to 2 points above a conventional investment loan, plus 1 to 2 points in origination fees. Most carry a prepayment penalty of three to five years, which conventional loans cannot have. And a property that does not rent well does not qualify, whatever your income.

On a $375,000 loan, one extra point of rate is about $260 a month, or $3,100 a year. Over a five-year hold that is $15,700 before fees. If you qualify conventionally and are under the ten financed property limit, conventional is usually cheaper.

The prepayment penalty matters if you plan to sell or refinance within a few years. A 5-4-3-2-1 step-down charges 5% of the balance in year one. Buying the penalty out costs rate. Finally, because these are business-purpose loans, they carry fewer consumer protections, and you cannot live in the property.