Hard Money vs DSCR Loans: Cost, Speed, and Which Deal Each One Fits
By Brad Geisen
· 5 min read
In this article
Hard money and DSCR loans are both "investor loans" and they are built for different halves of a deal. Hard money is for buying and fixing. DSCR loans are for holding. Comparing their interest rates side by side is like comparing a moving truck to a commuter car by miles per gallon.
This post lays out what each one costs, what each one requires, and how to decide, with the numbers on a $180,000 BRRRR that uses both.
What each loan is
Hard money is a short-term, asset-based loan from a private lender or fund. It is priced on the property and the plan more than on you. Typical shape: 6 to 18 months, interest-only, 10% to 13% rate, 1 to 3 points at closing, 85% to 90% of purchase price plus some or all of the rehab budget, closing in 5 to 10 days.
A DSCR loan is a 30-year investor mortgage qualified on the property's rent instead of your income. The lender computes a debt service coverage ratio (see how to calculate DSCR) and prices the loan on that ratio, your credit, and loan-to-value. Typical shape: 30-year fixed or ARM, rates roughly 1 to 1.5 points above conventional owner-occupied mortgages, 70% to 80% LTV, 3 to 6 weeks to close, property must be rent-ready or rented.
The two loans do not compete for the same job. Hard money exists because a DSCR lender will not fund a house with no kitchen. DSCR loans exist because nobody wants to hold a rental at 12% interest-only.
Side-by-side
| Hard money | DSCR loan | |
|---|---|---|
| Purpose | Acquisition + rehab | Long-term hold |
| Term | 6 to 18 months | 30 years |
| Rate (typical) | 10% to 13%, interest-only | Roughly 7% to 8.5%, amortizing |
| Points | 1 to 3 | 0 to 2 |
| Max LTV | 85% to 90% of purchase (+ rehab draws) | 70% to 80% of appraised value |
| Qualifies on | Deal, ARV, borrower experience | Property rent, credit, LTV |
| Property condition | Any | Habitable, usually rented |
| Time to close | 5 to 10 days | 3 to 6 weeks |
| Prepayment | Usually none or minimal | Often 3 to 5 year prepay penalty |
Figures are typical ranges as of this writing and vary by lender. Confirm with a lender in the directory.
Worked example: a $180,000 BRRRR that uses both
Phase 1: hard money
| Item | Amount |
|---|---|
| Down payment (10%) | $18,000 |
| Purchase closing costs (3%) | $5,400 |
| Rehab (paid from cash in this example) | $45,000 |
| Points (2% of $162,000) | $3,240 |
| Interest (6 months at 12%) | $9,720 |
| Holding costs (taxes, insurance, utilities; 6 months) | $900 |
| Cash in through rehab | $82,260 |
Financing cost for six months: $12,960 in points and interest. That is the price of speed and of borrowing against a house a bank would not touch.
Phase 2: DSCR refinance
| Item | Amount |
|---|---|
| New loan (75% of $290,000) | $217,500 |
| Refinance closing costs (3%) | $6,525 |
| Pay off hard money | $162,000 |
| Cash returned | $48,975 |
| Cash left in the deal | $82,260 − $48,975 = $33,285 |
| New payment (6.0%, 30 years) | $1,304/month |
Now the hold math. Rent $2,300; operating expenses about $877/month (taxes 1.2% and insurance 1.0% on the $290,000 value, plus 15% of rent for vacancy, maintenance, and reserves). NOI is $17,080/year. Debt service is $15,648/year. Cash flow is $1,432/year, about $119/month, on $33,285 left in. DSCR is 1.09, and equity is $72,500.
That DSCR is thin. A lender might approve it on the lender's gross-rent method, but the investor version says the hold is barely covering itself after reserves. A lower purchase price does not fix DSCR here, because the refinance is sized on the appraised value, not the price. What a lower price does fix is cash left in: at a $158,000 purchase (the 70% rule number: 70% of ARV minus rehab) the same refinance returns all but $8,931, and the same $119/month becomes a 16% cash-on-cash return. BRRRR vs fix and flip runs both exits on this property.
Run these numbers on a real property.
Run a BRRRR on a property you are watching →When to use hard money
- The property needs work a conventional or DSCR lender will not finance.
- You need to close in days, not weeks (auction, off-market, competing with cash).
- You plan to exit within a year, by sale or by refinance.
- Your personal income or DTI would not qualify you for conventional financing, and the deal is strong enough to stand on its own.
Hard money is expensive per month and cheap per deal if the timeline holds. A 6-month plan that becomes 12 months doubles the interest and can add an extension fee. Budget the extension before you sign.
When to use a DSCR loan
- You are buying a rent-ready property to hold.
- You want to keep conventional loan slots free or have already used them.
- Your income is complex, self-employed, or would not pass a debt-to-income test.
- You are refinancing out of hard money after a BRRRR.
The requirement to watch is the DSCR minimum. Most programs want 1.20 to 1.25 at their best pricing. If the property does not cover its payment on the lender's method, you will pay more in rate or put more down.
Read the prepayment penalty. Many DSCR loans carry a 3- to 5-year step-down penalty. If you might sell or refinance in year two, price that in or negotiate it out.
Cost per phase, not rate vs rate
The useful comparison on the example:
| Phase | Loan | Financing cost | Duration |
|---|---|---|---|
| Buy + rehab | Hard money | $12,960 (points + interest) | 6 months |
| Hold | DSCR | $6,525 closing + $15,648/year payments | 30 years |
Hard money cost $12,960 to make a $72,500 equity position exist. The DSCR loan costs $15,648 a year to hold it, against $17,080 of NOI. Neither is expensive or cheap in isolation; each is priced for what it does.
Stacking: DSCR loan plus seller second
A third structure sits between the two: a DSCR first at 70% to 75% LTV with the seller carrying a second for part of the balance. The Morby Method is the best-known version. It lets a buyer with limited cash acquire a rent-ready property without hard money, provided the DSCR lender allows subordinate financing (many do not, and those that do will count the second's payment in the ratio). Ask before you write the offer.
Finding lenders
Hard money is local. Lenders know their markets, and terms differ by state. DSCR lenders are more national but vary in minimum ratio, seasoning rules, and prepayment terms. DealGapIQ's Hard Money Lender Directory lists lenders by state served, loan type, and the strategies they fund.
We analyze. You decide. Not financial, legal, or investment advice. Loan terms are illustrative; confirm current terms with the lender.
Frequently asked questions
- Can you refinance a hard money loan into a DSCR loan?
- Yes, and that is the standard BRRRR exit. Buy and rehab on hard money, then refinance into a 30-year DSCR loan once the property is rented and appraises at its after-repair value. Most DSCR lenders want the property leased, a rent that covers the new payment at their minimum ratio, and in some programs a seasoning period of 3 to 6 months of ownership before they will lend on the appraised value rather than the purchase price.
- What credit score does a DSCR loan need?
- Most DSCR programs start at a 660 to 680 FICO, with the best pricing at 740 and above. The loan is qualified on the property's rent, not your personal income, so there is no debt-to-income test, but credit still sets the rate and maximum loan-to-value. Hard money lenders weigh credit less and the deal more.
- What are typical hard money points and rates?
- Hard money commonly runs 10% to 13% interest with 1 to 3 origination points, interest-only, for terms of 6 to 18 months. On a $162,000 loan at 12% with 2 points, six months of interest is $9,720 and points are $3,240, about $12,960 of financing cost. Rates and points vary widely by lender, market, and borrower experience.
- Which is cheaper, hard money or a DSCR loan?
- Per month, the DSCR loan is far cheaper: a 30-year amortizing rate in the 7% range against 12% interest-only. But hard money funds rehab and closes in days, which a DSCR loan will not do. The right comparison is not rate against rate; it is total financing cost for the phase of the deal each one is built for.
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Written by
Founder of DealGapIQ. Previously founded Foreclosure.com and built HomePath.com for Fannie Mae and HomeSteps.com for Freddie Mac. 35+ years in real estate data.
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