The short version
| Hard money (Larry the Lender) | DSCR loan | |
|---|---|---|
| Used for | Buying and fixing; short holds | Holding a rental long term |
| Term | 6 or 12 months, renewable | Long-term, set by the lender |
| Approved mainly on | What the property is worth today, from comparable sales | Rent compared to the monthly payment |
| Property condition | Any investment property, including fixer-uppers | Usually rented or ready to rent |
| Speed | Same-day decision; closing as soon as the next day | Set by the lender |
| Cost | 12.99% interest-only, plus 2 or 3 points | Set by the lender; the ratio usually affects the rate |
| Prepayment penalty | None, and no minimum interest | Varies by lender; ask |
| Offered by Larry | Yes | No |
How a DSCR Loan Works
DSCR stands for debt service coverage ratio. It answers one question: does the rent cover the payment?
DSCR = monthly rent / monthly payment (principal, interest, taxes, insurance, and any HOA dues)
Say a house rents for $2,400 a month and the full payment would be $2,000. That’s a DSCR of 1.20, which means the rent covers the payment with $400 to spare. If the payment were $2,600 instead, the ratio drops to 0.92, and the rent doesn’t cover it.
Every DSCR lender sets its own minimum ratio, and the ratio usually affects both the rate and how much you can borrow. Ask each lender what they require before you count on a number.
Why The Property Usually Has To Be Finished First
A DSCR loan is sized on rent. A house with no kitchen, no tenant, and a dumpster in the driveway doesn’t have rent yet, and that’s hard to underwrite as a long-term rental.
That’s the gap hard money fills. Larry values the property himself from comparable sales and lends on what it’s worth today, on investment property of any type, including the ones that aren’t ready to rent. Decisions come the same day, and closing can happen as soon as the next day.
Going From Hard Money to DSCR, Step by Step
This is the path a lot of rental investors follow, and it’s where the term “BRRRR” comes from: buy, rehab, rent, refinance, repeat.
Buy with hard money. You close fast, which matters when you’re competing with cash buyers. First-time borrowers with Larry typically borrow 70% to 80% of his valuation.
Rehab the property. While the work gets done, you’re paying interest only, with no principal due until payoff.
Rent it. Get a tenant in place so you have a real rent number to show a DSCR lender.
Refinance into a DSCR loan. The new loan pays off the hard money loan. Larry has no prepayment penalty and no minimum interest, so the day your refinance closes, you’re done paying him.
Repeat. That’s the last R.
What The Hard Money Part Costs
Here’s a $150,000 loan from Larry, paid off by a DSCR refinance after five months. Interest runs $1,623.75 a month, so five months is $8,118.75. On a 6-month term, add 2 points ($3,000) for a total of $11,118.75. On a 12-month term, it’s 3 points ($4,500) and $12,618.75.
That $1,500 difference is the reason to be realistic about your timeline. Add up the rehab, the time to find a tenant, and the time a DSCR lender needs to close, then pick the term that covers it. If it runs long, Larry’s loans are renewable. Ask what a renewal costs before you count on one.
Other Ways Out of a Hard Money Loan
A DSCR refinance is one exit. It isn’t the only one.
You can sell the property, which is the plan on a flip. You can refinance into a conventional mortgage instead, if your credit and income qualify and the property appraises well. Or you can simply pay the loan off from other funds. Every one of those works the same way with Larry: no prepayment penalty, interest only for the months you used.
When You Can Skip Hard Money
If the property is already rented, in good shape, and you’re not racing a deadline, you may not need a hard money loan at all. Going straight to a DSCR lender or a conventional mortgage will cost less. Hard money earns its cost when speed or the property’s condition makes the long-term loan impossible right now.
