Evaluating DSCR Loans and conventional loans is typically the first comparison made by STR investors, or aspiring STR investors, since this is where most people just getting into real estate investing start.
The pros and cons of DSCR Loans vs. conventional loans for short term rental loans look similar to the comparison for DSCR Loans versus conventional loans in general. While conventional loans have the advantage of lower interest rates and fees, more uniform/reliable standards and borrower protections/regulations, the familiar advantages of DSCR Loans also exist when it comes to short term rentals, such as no tax returns or income verification requirement, ability to use LLCs or entities and the much higher loan and portfolio size limits. These advantages are why many investors choose DSCR Loans to finance their rental properties even with sometimes higher rates and fees.
Conventional mortgage lenders approach short term rentals through a fundamentally different lens than DSCR Lenders. Rather than evaluating the property’s ability to service its own debt, i.e. through a debt-service-coverage-ratio (DSCR), conventional underwriting measures how rental income integrates into the borrower’s overall debt-to-income (DTI) ratio. In practice, that means reliance on tax returns and conservative income adjustments, a framework designed for hobbyists but often mismatched with the needs for serious real estate investors, especially those focused on STRs.
In addition to the significant difference in qualification metrics and methodology for the property’s income (i.e. utilizing a DTI ratio versus a DSCR ratio), conventional lenders will utilize rules and methodologies that take a far less borrower-friendly approach to STR income potential. For acquisitions, i.e. vacant properties planned to be utilized as a short term rental, not only will conventional lenders rely on appraiser-estimated market rents (i.e. from the 1007 form or 1025 form if multiple units), but require it to be based on long-term market rents and then take a 25% haircut off of that! This is sometimes referred to as the “75% Rule,” where only 75% of the projected long-term market rents can be utilized into the “income” within the borrower’s personal DTI ratio. Since properties utilized as short term rentals generally produce about twice as much as they would if utilized as a long-term rental, that means that conventional lenders will only “count” on average 37.5% of a property’s projected STR rents, an extremely conservative approach making it very hard to qualify unless utilizing very low leverage.
Additionally, conventional lenders are also harsh towards refinances of existing STRs, even with strong operating history. While DSCR Lenders will typically “count” 100% of the gross annual rents from a currently operated STR as qualifying revenue, conventional lenders look to the Schedule E of individual borrowers’ tax returns, which typically means giving a much lower credit for income. This is because conventional lenders won’t use just gross revenue; they will utilize reported net rental income from the tax returns into their qualifying income calculation. This represents a problem for many investors who utilize tax planning and avoidance strategies to make their STRs appear less profitable on paper to maximize tax savings (this can be done completely legally), however this then hurts qualification for a (conventional) loan.
These much harsher treatments towards STR income qualification would be bad enough if conventional lenders also qualified with a DSCR ratio, as these treatments “count” less income and revenue than even the least “STR-friendly” DSCR Lenders in the market. However, conventional loans paint an even bleaker picture for STRs considering these revenue numbers go into the individual borrower’s personal DTI ratio rather than a standalone analysis of the specific property. A DTI ratio is what’s referred to in mortgage circles as “global,” meaning it includes all the individual borrower’s personal income (i.e. from a W2 job, rentals, etc.) and personal expenses (including car loans and leases, student loans, alimony or child support, etc.). In this light, it’s easy to see how, when investors start to add a few properties to their portfolio, combined with harsh lender haircuts on STR property income earned and the tendency for investors to strategically take losses for tax purposes, it becomes almost impossible to scale a portfolio with conventional loans without breaching the 45%-50% DTI limits.
It also becomes apparent that the specific hurdles that appear with utilizing conventional loans for investing in short term rentals are coincidentally (or maybe not so coincidentally) the exact problems that DSCR Loans solve. Specifically, while conventional loans take harsh haircuts on rental income for acquisitions of new properties (i.e. 75% of long-term market rents), even the most conservative DSCR Lenders will utilize 100% of such market rents, with many now allowing much higher AirDNA projections. Additionally, the problem of having to choose whether to save on tax liability with STR accounting strategies or getting a conventional loan by not maximizing taxable expenses is not an issue for DSCR Loans, which don’t require or even look at tax returns. Finally, the scaling limitations as more and more properties pressuring DTI ratios past qualification limits (not to mention more loans hitting personal credit reports and straining scores) aren’t an issue for DSCR Loans either, which evaluate each new property individually.
In addition to the major qualification differences between conventional loans and DSCR Loans for short term rentals, all of the same pros and cons and general differences of using conventional loans and DSCR Loans still apply. Conventional loans have the familiar advantages of lower rates (although not as significant as most people think, typically 1% or less) and flexibility on occupancy (i.e. don’t have to always strictly be used as rentals).
DSCR Loans have lots of advantages too, particularly in terms of the ability to use LLCs or other entity borrowing structures, as well as higher loan size limits (generally $2,500,000 vs. $832,750 for conventional loans in 2026) and concentration limits (maximum of 10 properties and conventional loans total per individual versus essentially no limits for DSCR Loans). The ability to use LLCs as the borrowing entity (and owner of the property) for DSCR Loans takes on even greater importance for STR investors, as the frequent turnover of guests for short term rentals and associated risks make separating personal finances and liability from STR properties even more valuable than when financing traditional long-term rentals.
When taking the much easier qualification methodologies (especially with growing portfolios) and the other many benefits including ability to use LLC structures, borrow more money for higher-end properties, and expand a portfolio past single-digit doors together, it’s clear why DSCR Loans have completely outpaced conventional loans as the main financing option for serious STR investors. Put bluntly: if conventional loans are like batting with one hand tied behind your back, DSCR loans are stepping up to the plate with a full swing.
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