Before using DSCR Loans to invest in real estate, which entails taking on six- or even seven-figure personally guaranteed debt, it’s important to have a good understanding of the key elements of DSCR Loan terms and how the loans are structured. It is a great advantage for borrowers to have all the information needed to understand these loans at their fingertips; critical information that not too long ago required specialized expertise from mortgage brokers or finance experts.
While DSCR Loans and Conventional Loans vary in many different and important ways, structurally, they look very similar. Both are almost always 30-year mortgage loans where the debt is secured by a residential property. The following covers key loan terms and concepts crucial for any borrower to understand who is planning to sign for a DSCR Loan to finance their rental properties.
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Loan Term refers to the length of the loan from first payment date to the maturity date, typically expressed in months or years. Nearly all DSCR Loans have 30-Year Terms (or 360 months), although there are some lenders that offer loans with lower durations such as 15 years or even as long as 40 years. However, 30-year loans are the overwhelming norm for DSCR Loans.
The First Payment Date is the first date of the loan term in which the first full monthly payment is due. This date is going to be the “first of the month” (almost all DSCR Loans have payment dates on the 1st day of the month), of the first month that occurs after a full month has occurred since closing.
Mortgage loans are paid in arrears, meaning that when a full monthly payment is made, that payment is for interest that has “accrued” or built up over the previous thirty days. This is in contrast with payment structures that are “paid in advance.” An example of payments that are typically made in advance and likely familiar to real estate investors are leases, where a lease payment (i.e. rent) is due on the first of the month, and that payment covers the month following that payment (for example, a rent payment made on the first of September would cover rent for the full month of September, September 1 through September 30). In contrast, a debt payment covers interest for the prior month, so in our example, a loan payment made on September 1 would cover interest for the full prior month, or August 1 through August 31.
Because mortgage loans are paid in arrears, the first full monthly payment can only be made after a full month of interest has accrued. So, for example, a mortgage loan that is closed in the middle of September, such as with a closing date of September 15, will have a First Payment Date of November 1, instead of October 1. This is because on October 1, a full 30 days’ worth of interest would not have accrued, so in order to start a repeatable monthly schedule of payments on the first of a month, the first payment date must be pushed to the following month, November in our example.
So does that mean that there is no interest due for the rest of the month if a DSCR Loan closes in the middle of the month? Not exactly. In these cases, any interest due for a partial month, or the days remaining in the month in which a loan closes, is paid for upfront and at closing. This interest payment, typically lumped in with “closing costs” and featured on the settlement statement, is calculated based on how many days of interest are left in the month multiplied by the interest rate on the loan, and referred to as “Prepaid Interest”, “Upfront Interest” or “Stub Interest.” Following this upfront interest payment, the First Payment Date on the loan will occur typically a little more than a month later, on the first “first of the month” that occurs after a full month of interest has a chance to accrue. Almost all DSCR Loans will have this prepaid interest due at closing, and an official First Payment Date more than a month after closing, with the sole exception of DSCR Loans closed exactly on a first of the month, where a full month of interest will get a chance to accrue ahead of the immediately following month.
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Q: What does “Stub Interest” in relation to DSCR Loans mean?
A: Stub Interest, also called “Prepaid Interest” or “Upfront Interest,” is the interest due between the DSCR loan’s closing date and the end of that same calendar month. It’s paid at closing so the loan can begin on a clean, monthly amortization schedule. For example, if a DSCR loan closes on July 11, 2025, interest will be charged for the remaining 21 days of July (calculated as interest rate × loan amount × 21 ÷ 365) and collected at closing. The first full monthly payment — covering interest for August 1 to August 31 — would then be due on September 1, 2025.
The Interest Rate is annual interest cost on the loan, expressed as a percentage. While the vast majority of DSCR Loans have fixed interest rates (meaning the interest rate percentage is the same for the entire loan term), some DSCR Loans operate on what is often referred to as a “Hybrid (Fixed to ARM)” structure, where “ARM” stands for “Adjustable Rate Mortgage” and the loan starts out with a fixed interest rate for a set number of years, then changes or “floats” and can go up or down. Hybrid (Fixed to ARM) options can be a good choice for some investors, but the structure is complex and solid understanding of all the nuances and provisions is essential before exploring this option.
A Closing Fee, often called “Points” or “origination points” is a fixed fee (typically expressed as percentage of loan amount) that is charged upfront at closing. This represents revenue for DSCR Lenders and one of the ways lenders make money, along with ongoing interest due. Sometimes, borrowers can pay more in points to lower the interest rate (often called “buying down” or “discount points”). This is an option where a borrower will pay more upfront essentially in exchange for paying less in interest payments every month, and choosing when to pay (either more upfront or more each month) can depend on multiple factors and preferences. One top benefit of DSCR Loans is flexibility, so many DSCR Lenders will offer multiple loan quote options with different rates based on how many points are paid (i.e. 3%, 2%, 1% or 0% - also called “par”). Shrewd borrowers can evaluate multiple combinations of points/rate to tailor their financing optimally for each property in their portfolio.
A Fully Amortizing loan has a fixed monthly payment over the course of the entire loan term, with a portion of the fixed payment going to interest and a portion of the fixed payment going to pay down principal. While the monthly payment will always be the same, the portion of the payment that is interest and the portion that is principal will change, with the portion that is interest decreasing over the life of the loan – more information on “amortization math” here.
While most DSCR Loans are fully amortizing, a sizable percentage of loans choose what is commonly (but misleadingly) called an “interest-only” structure. This structure means that instead of a fixed monthly payment with a portion of the payment paying interest and a portion paying back principal, only interest is required, and no principal is paid back each month. Unlike a fully amortizing structure, where the loan balance decreases with each payment, the loan balance stays the same when monthly payments are made.
DSCR Loans that are structured with the “interest-only” option typically will require interest-only payments only for the first 10 years of the loan. For the last twenty years of the loan term, the loan will have a fixed monthly payment, amortizing over the last twenty years on what’s called a 20-year “amortization schedule.” As such, it’s important for investors to understand that an “Interest-Only” option for a DSCR Loan likely means a larger, fixed and amortizing payment after ten years, better described as “Partial-IO”; always verify these details!
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Q: What are the typical loan terms for DSCR loans (length and amortization)?
A) DSCR Loans typically have 30-year terms (360 months) and are fully amortizing, although most lenders have an option where only interest payments are required for the first 10 years.
Q: Can I get an interest-only DSCR loan to maximize cash flow?
A: Yes. Many DSCR loans offer interest-only (IO) options, which reduce monthly PITIA payments and boost cash flow during the early years. However, IO payments typically last for the first 10 years, after which the loan converts to fully amortizing — resulting in higher payments and lower cash flow. This is why they are more accurately referred to as “Partial-IO” DSCR loans.
Check out the next section DSCR Loan Structure Advanced Concepts to dig deeper!
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