Property Types for DSCR Loans
DSCR loans are designed exclusively for investment property transactions that are designated for business purpose only. Since qualification is based on the cash flow from the asset, the property must be income-producing and non-owner-occupied. Eligible and Ineligible Property Types for DSCR loans are explained below.
Eligible Property Types
DSCR loans offer solutions for standard residential investment properties and some specialized types, provided the primary use is rental income.
A. Residential Income Properties (1–4 Units)
The most common and broadly eligible property types are traditional residential units up to four units:
- Single-Family Residences (SFR): This includes single-family homes, attached and detached.
- SFRs with one or more Accessory Dwelling Units (ADU) are permitted, provided the municipality allows them, and the appraiser confirms compliance and provides similar comparables.
- Small Residential Income Property (2–4 Units): Duplexes, triplexes, and quadruplexes (2–4 unit attached and detached properties) are eligible.
- For DSCR transactions, 2–4 unit properties often have maximum LTV restrictions (e.g., Max 75% LTV) compared to single-unit properties.
- Townhouses and PUDs (Planned Unit Developments).
B. Condominiums and Specialty Housing
DSCR loans are more flexible than conventional loans regarding certain community-governed and non-standard properties:
- Warrantable and Non-Warrantable Condominiums: Both warrantable and non-warrantable condos are generally eligible.
- LTV restrictions may apply to non-warrantable condos (e.g., LTV may be 10% below the program maximum, up to a maximum of 70% LTV/CLTV).
- Condotels: Condotels (Condominium Hotels) are eligible under certain DSCR programs for purchase and rate/term refinances, though maximum LTVs are restricted.
- Co-ops (Cooperatives): Eligible under the Prime DSCR program.
- Modular Homes: Modular, prefabricated, panelized, or sectional housing is eligible, provided it assumes the characteristics of site-built housing, is legally classified as real property, and conforms to local building codes.
- Leasehold Properties: Permitted if they meet Fannie Mae criteria.
C. Rental Use
DSCR loans are suitable for various rental models:
- Long-Term Rentals (LTRs): Standard 12-month lease agreements.
- Short-Term Rentals (STRs): Properties leased on a nightly, weekly, monthly, or seasonal basis, often managed via platforms like Airbnb or VRBO.
D. Business Entity Owned Property
Ownership or title vesting in the name of a Limited Liability Company (LLC) is acceptable on investment property transactions only.
Ineligible Property Types and Restrictions
DSCR guidelines strictly prohibit properties used for purposes other than income generation or those deemed too high-risk or difficult to liquidate.
A. Occupancy and Purpose
- Primary Residence / Second Home: DSCR loans cannot be used for a primary residence or second home; they are strictly for non-owner-occupied investment properties.
- Fixer-Uppers / Construction: The property must be turnkey and ready to be rented. DSCR loans are not for properties that need major repairs or are under construction. They cannot be used for fix-and-flip projects.
- Illegal Use: Properties that are not in compliance with local zoning regulations are ineligible.
B. Property Structure and Condition
- Condotels/Condos with Hotel-like features: While some DSCR programs allow Condotels, some DSCR series explicitly list them as ineligible.
- Co-ops: The River Series lists co-ops as ineligible.
- Manufactured/Mobile Homes: These are generally unacceptable property types for DSCR loans.
- Condition Rating: Properties with a condition or quality rating of C5 or C6 are generally not eligible for purchase.
- Unique/Atypical Properties: Properties that are unique (e.g., Geodesic Domes, Log Homes, Berm, and Earth homes) or atypical are generally ineligible.
C. Acreage and Use Restrictions
Acreage limits restrict loans on properties that may be partially used for non-residential purposes:
- General Acreage Limit: DSCR loans often have maximum acreage limits, typically 5 acres in the Non-QM Advantage series and the Edge Investor Elite program. The Edge Investor Classic allows up to 10 acres.
- Rural and Agricultural Properties: Properties that are rural (in some programs) or agriculturally zoned and used for farming, ranches, or orchards are generally ineligible for DSCR financing, as they provide a source of non-rental income or are outside the typical residential market.
D. Vesting and Fractional Ownership
- Fractional Financing / Common Interest Structures: Loans for projects involving fractional financing or common interest structures (or similar) are ineligible.
- Business Entity Restrictions: While LLC vesting is permitted for DSCR, other business entities like Limited and General Partnerships, Irrevocable Trusts, and Land Trusts are often ineligible forms of vesting.
FAQ's
Yes, some specialized DSCR programs may cover Mixed Use properties if the majority of the square footage and rental income is residential. However, other guidelines explicitly list Mixed Use properties as ineligible.
Manufactured or Mobile Homes and properties classified as Working farms, ranches, or orchards are generally ineligible.
Acreage limits apply. For DSCR, the maximum acreage permitted may be 5 acres, though some programs may allow up to 10 acres.
Yes. Vesting or title ownership in the name of an LLC (Limited Liability Company) is acceptable, specifically on investment property transactions.
DSCR loans are eligible for Condominiums—both Warrantable and Non-Warrantable. However, some lenders may limit LTV on non-warrantable condos.
Yes. DSCR loans can be used for all types of rentals, including STR properties, as long as the income potential is verifiable.
No. The property must be turnkey and move-in ready for tenants. DSCR loans are not for fixer-uppers or properties that need major repairs, renovations, or construction.
No. DSCR loans are strictly for investment properties and cannot be used to purchase a primary or secondary residence.
DSCR loans typically cover 1-4 unit residential properties, including Single Family Residences (SFR), townhouses, and 2-4 unit detached properties.
The property must be an investment property only, designated for business purposes and cannot be occupied by the borrower or any family member.
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