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DSCR Loans are often described as financing that sits in the middle of residential real estate and commercial real estate. They are residential in that the properties are residential in nature, i.e. the usage is for living in them. But they are also commercial in that all the properties used to secure the loans must have a commercial use in terms of solely tenant occupancy (i.e. rented to generate income, never owner-occupied). DSCR Loans occupy this distinct intersection between residential and commercial real estate financing, a unique loan product for a specific slice of the real estate market.
Of course, as is so often the case in real estate, there are exceptions, gray areas, and a fair amount of semantic confusion. In DSCR lending, “residential properties” typically refer to residences with one to four units, including single-family homes, duplexes, triplexes and fourplexes. These are all eligible under standard DSCR Loan guidelines. However, properties with five or more units, despite still being residential in use, are generally categorized as “multifamily” and fall outside the traditional DSCR Loan universe. These are typically financed through commercial loan programs, not by DSCR Lenders.
The terminology can be the opposite of intuitive. A three-unit residential investment property is considered “residential” under mortgage classification standards, while a five-unit is considered “commercial multifamily.” Additionally, some DSCR Lenders have recently begun offering Multifamily DSCR Loan products, which expand eligibility to 5–8 or even 5–10 unit properties, but these programs involve separate guidelines and additional risk-based overlays. Importantly, 2–4 unit properties are not considered “multifamily” in lending lingo, despite the presence of multiple units, and are instead evaluated under standard “residential” lending umbrella.
To muddy the waters further, while DSCR loans are designed for properties with residential usage, some DSCR Lenders now allow for limited mixed-use properties under certain conditions. These typically involve buildings with one or two commercial units, such as a retail storefront beneath apartments, but require that the property be majority residential in use. That often means more than 50% of the gross rental income, square footage, and unit count must come from residential components. Even more confusingly, owner-occupancy in these cases, for the commercial unit by the owner’s business (i.e. not living there, but operating a business there), is typically allowed.
Short-term rentals (STRs) introduce yet another layer of complexity. These properties may function more like hospitality assets, with nightly turnovers and guest-based operations, yet they remain eligible for DSCR Loans as long as the property is fundamentally residential in nature. In other words, the key test is whether the property is capable of being used as a full-time residence, even if its actual usage mimics a hotel. By contrast, properties that operate explicitly as bed and breakfasts, boutique hotels, or licensed hospitality businesses are generally classified as commercial and ineligible for DSCR Loans.
While DSCR Loan programs vary in their handling of larger or newer property types, there is a consistent set of property types that are broadly accepted across nearly all DSCR Lenders. These core residential asset classes represent the foundation of DSCR lending and are generally allowed by all DSCR Lenders.
Detached, one-unit residential properties used solely for investment purposes are the most common and universally eligible form of DSCR Loan collateral. These are classic “houses” and are the most straightforward and common property type that secures DSCR Loans. These properties are typically abbreviated to “SFR,” which can sometimes also be the same abbreviation used for Single Family Rentals, however the property type, single-family residence should be thought of as distinct from its usage (i.e. rental or owner-occupancy). Additionally, SFRs refer to one-unit properties that are not within any sort of HOA regime, such as a condo or planned unit development (PUD) regime.
Duplexes, triplexes, and quadruplexes (also sometimes called “fourplexes” or “quadplexes”) fall under the standard definition of residential real estate and are fully eligible for DSCR financing. Despite housing multiple tenants, these properties are not considered “multifamily” for DSCR Loan classification and do not fall under the expanded Multifamily DSCR Loan programs used for 5+ unit properties.
Townhomes, attached or semi-attached residences with fee simple ownership, are commonly eligible, provided the property is residential in use and consistent with local zoning. DSCR Lenders generally treat townhomes the same as SFRs, for both pricing (i.e. rates and fees) and eligibility.
A Planned Unit Development (i.e. “PUD”) is a residential community in which each owner holds title to their individual lot and structure, while shared areas, such as roads, green spaces, or recreational amenities, are owned and maintained by a homeowner’s association (HOA). A single-family residence would qualify as a “PUD” under DSCR Loan guidelines if membership in the HOA is automatic and non-severable for all unit owners, payment of HOA dues is mandatory and the common elements are owned and operated by the HOA for the benefit of all owners. Additionally, note that most “townhomes” are in PUDs, and are thus considered “PUDs” for qualification purposes (although there are no real differences in treatment so it’s not impactful).
However, if a DSCR Loan is secured by a property that qualifies as a PUD, its generally treated exactly like a non-PUD SFR, with some light extra loan documentation (typically a “PUD Rider” where the borrower signs a document agreeing to follow the rules of the PUD, and the requirement to provide a master insurance policy, if it covers the individual home instead of just the common areas, and HOA bylaws, which is how the DSCR Lender checks if there are restrictions on renting, however sometimes this can be looked up via the county’s website, so no actual extra documentation needs to be provided).
Also, HOA dues are included in the PITIA and DSCR ratio calculations. Of course, for PUD properties securing DSCR Loans, the property must be allowed to be rented under HOA rules, otherwise the usage wouldn’t qualify, so this will likely be verified by the DSCR Lender in the loan qualification process. Note that there may be a distinction between allowing a unit within a HUD to be rented, and allowing a unit within a HUD to be rented on a short-term basis (i.e. airbnb), and since many investors utilizing DSCR Loans are interested in optionality in renting strategy, this is an important nuance in many cases.
DSCR Lenders broadly allow financing for condominium units, including both warrantable and many non-warrantable projects. While condos often trigger additional review of the HOA, project status, master insurance policy and legal structure, they remain a common and accepted form of collateral for DSCR Loans.
A notable subset of condo units are properties referred to by mortgage lenders as “Condo-Sites.” These are condominium units located in a project (or condominium) containing four or fewer total units. Even though these are technically condominiums from a legal and title perspective, DSCR Lenders typically treat them as if they were SFRs for eligibility, underwriting, and pricing purposes. This distinction can simplify execution and eliminate some of the project-level scrutiny typically applied to DSCR Loans for units in larger condo developments.
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Q: What is a Condo-Site?
A: A “Condo-Site” is a type of condo unit that is in an overall condominium project that contains four or fewer units. Because it only shares a condo regime with so few other units and more closely resembles units within a duplex, triplex or fourplex rather than a large condo building, mortgage lenders, including DSCR Lenders, treat these units as SFRs or standard single-family residences for qualification and pricing purposes.
These property types form the core of what DSCR Lenders will finance with consistency and confidence even though there may be program-level conditions related to appraisal, usage, or HOA health. These property types are the “bread and butter” collateral for mainstream DSCR Loan programs. With the exception of condo units not considered “condo-sites;” DSCR Loans secured by these types of properties will be eligible for each lender’s maximum leverage limits and best pricing (lowest rates and/or closing fees).
While many property types are universally accepted across DSCR Loan programs, there are several categories of real estate collateral that are considered situationally eligible. These properties are approved by some lenders but may be excluded or heavily conditioned by others. In most of these cases, DSCR Loans for properties in this category come with additional documentation, stricter program requirements (i.e. lower maximum LTVs and higher minimum DSCR ratios and qualifying credit scores) and higher pricing (i.e. higher rates and/or fees), however the good news is that they are typically eligible for financing from most DSCR Lenders.
Condotel units, or units in condominiums that operate with hotel-like amenities and centralized short-term rental services (i.e. with the inclusion of a “front desk”), are eligible with select DSCR Lenders, but often trigger additionally scrutiny. These properties blur the line between residential and hospitality use and are typically evaluated for both legal structure and operational independence from hotel management. They will also require some things that allow for at least the possibility of long-term living, such as a functional kitchen that includes a stove top and a separate living from the bedroom. While some DSCR Lenders will allow condotels, some, especially those that are less “STR-friendly,” still exclude them outright.
Properties with five or more residential units are traditionally classified as commercial multifamily and fall outside the scope of standard DSCR loan programs. However, a growing number of lenders now offer expanded “Multifamily DSCR Loan” products that permit 5–8 or even 5–10-unit properties under separate guidelines and qualification criteria. These programs often come with lower maximum LTVs, higher DSCR ratio minimums and stricter credit and experience hurdles, among other additional requirements. Multifamily properties financed with DSCR Loans also will typically come with additional appraisal requirements, including a full commercial “narrative-style” appraisal, although this is not universally required among DSCR Lenders offering Multifamily DSCR Loans.
Buildings with both residential and commercial space, such as a ground-floor retail unit with apartments above, are allowed by certain DSCR Lenders under limited circumstances. Generally, these mixed-use properties will be limited to between 2 and 8 units and must be majority residential in use, based on square footage, unit count, and rental income. Eligibility frequently depends on the type of commercial tenant and whether the property conforms to local zoning, among other factors.
Cabin properties such as log homes, are ineligible for DSCR Loans, but there are a lot of properties that sit in the blurry grey area that contain some cabin or log features and some traditional house features, albeit with some cabin and log home flavor. These properties, often located in vacation markets that can be great investment options for short term rentals, can sometimes be eligible to secure DSCR Loans if they are more SFR-like in nature, and the log cabin features are more stylistic than structural. While most DSCR Lenders may evaluate these properties on a case-by-case basis, generally a property is considered “Cabin-Style” and not an ineligible cabin if it contains these four requirements:
DSCR Lenders that approve loans on “Cabin-Style” properties will typically require all four of the above to be present. In rare cases, they can be approved if three of the four or even two of the four are present.
Manufactured or modular housing is accepted by only a small subset of DSCR Lenders. When allowed, these properties typically must be classified as real property, permanently affixed and compliant with HUD-code standards. Even among lenders that do allow manufactured homes, overlays are common and can include higher minimum DSCR ratio, stricter valuation scrutiny and other special limits and considerations.
Co-ops or “cooperative corporations” are where unit owners own shares in a corporation that owns and operates a building, rather than owning the individual units directly. Co-ops function similarly to condo projects with a board generally managing the day-to-day and overall building, however there are key structure differences. Because investors own shares in co-ops and not the real estate units, co-op units have generally been strictly ineligible for DSCR Loans. However, in recent years, some DSCR Lenders have begun offering loans for co-op units utilized as rentals, and treat them with similar rules and restrictions as condo units.
Certain property types fall entirely outside the scope of DSCR Loan eligibility due to their non-conforming structure, limited marketability or fundamental incompatibility with DSCR Loan underwriting. The rule of thumb is that if the DSCR lender has to foreclose on the property, is there a liquid and large enough pool of potential renters or buyers for it? If the answer is “No,” then typically these properties will be ineligible for DSCR loans. The following is a list of property types that are not permitted under any standard DSCR Loan program, regardless of rental performance or potential:
Unimproved land with no habitable structures is not eligible for a DSCR Loan. DSCR Loans require income-producing residential real estate as collateral, and raw land carries no rental income needed for DSCR ratio calculations.
Buildings zoned or used entirely for commercial purposes, such as retail, office, or industrial, are ineligible for DSCR Loans. This includes mixed-use properties where the commercial component is dominant in terms of square footage, rent roll, or occupancy, or have more total units than the typical Mixed Use DSCR Loan limits (typically 8 units max for mixed-use properties). This can sometimes be a point of confusion as many lenders that lend on commercial real estate use a DSCR ratio calculation as a central part of the qualification process and underwriting. But this doesn’t make these loans DSCR Loans, even if the lending metric with the same name is utilized by the lender.
While some DSCR Lenders offer specialized “Multifamily DSCR Loans” for multifamily properties up to 10 units, properties with 11 or more units fall into the category of institutional multifamily and are not permitted under any current DSCR Loan programs. Additionally, Short Term Rental properties that more closely resemble hotels or motels, often delineated simply by unit count (i.e. 5 or more units), are considered “commercial” by DSCR Lenders and not eligible for Multifamily DSCR Loans.
Properties designed or retrofitted for elder care, memory care, or medical-assisted living are excluded. These assets are classified as commercial healthcare facilities and are not considered residential or eligible for DSCR Loans.
Despite their appeal in short-term rental markets, true “log cabins” are typically ineligible due to construction type, lack of comparable sales, and limited resale marketability in most regions. If the property doesn’t meet all the requirements of a “cabin-style” residence, typically indicating that it is potentially suitable for year-round use and full-time living, it will be ineligible for DSCR Loans.
Group housing models used for recovery, rehabilitation, or transitional living typically are excluded for DSCR Loan eligibility. These properties are often subject to licensing, staffing requirements, or regulatory oversight that disqualify them from standard residential classification. While the usage of the property might be okay in some rare circumstances, anything at all structural related to these uses (such as locks on individual doors or built-in alterations) render these types of properties ineligible for DSCR Loans. Additionally, property usage in this fashion can run the risk of neighbor complaints and other issues, which could increase risk of leasing and cash flow, so DSCR Lenders will typically stay away from these properties.
Properties operating as hospitality businesses, especially those with multiple rentable rooms and shared facilities, are not eligible. These are considered commercial in both usage and structure, regardless of physical layout. This type of usage is also typically tailored to the individual owner-operator, making it difficult for a foreclosing lender to recreate the rental income coming with these peculiar arrangements.
Working farms, ranches, or properties with active agricultural use are excluded from DSCR Loan eligibility. This includes land with income from livestock, crop production, or agriculture-based operations (including “hobby farms”). Other business operations besides standard residential tenancy can complicate operations and even if providing additional revenue for the owner. They can also come with increased risks and expenses outside the scope of DSCR Loan programs.
Seasonal homes or structures lacking permanent heating, insulation, or required utilities are not permitted under DSCR Loan programs. Eligible collateral must be suitable for year-round residential occupancy, even if projected income from only the “high-season” months can fully satisfy the DSCR ratio requirements. Note that this can be an area with exceptions and nuance, for example, some properties in markets such as South Florida where permanent heating is not needed or typical, can sometimes be allowed by DSCR Lenders, especially if this feature of the market is affirmatively noted in the appraisal.
Floating homes, boats with residential interiors, and other marine-based housing options are not considered real property and cannot be properties securing DSCR Loans. Houseboats are ineligible because, of course, the borrower could simply “float away” with the collateral in case the lender needed to exercise foreclosure rights.
Highly unconventional structures, including domes, yurts, container homes, treehouses, and similar alternative dwellings, are generally not eligible for DSCR Loans. However, these continue to be an area of interest and inquiry for many investors, especially those focused in the short term rental (STR) space. These properties lack broad resale comparability and often fall outside the scope of standard appraisal methodology. While increasingly popular among STR investors, the general lack of market depth (i.e. interested potential buyers) if put to market makes them inappropriate for DSCR Loans.
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At a high level, DSCR Loans must be secured by residential property that has a large set of potential renters and buyers. This theme is present throughout property eligibility standards and includes minimum square footages per property and per unit, with the general idea that when a unit is too small, then the potential pool of people (whether to rent or buy and occupy) is too small as well, as the vast majority of people will require a certain amount of space. DSCR Loan programs have minimum square footage thresholds that apply across virtually all lenders.
These requirements are designed to ensure collateral meets minimum standards for habitability, marketability and appraisal reliability. Note that these square footage requirements generally apply to interior heated living space and do not include garages, unfinished basements, outdoor structures, or shared corridors. Properties that fall below these thresholds are typically considered functionally obsolete or economically nonviable, and thus ineligible for DSCR Loans, although this is an area of DSCR Lending when “exceptions” are commonly granted, and it can never hurt to inquire about possible lender overrides for properties just short of size requirements.
Detached one-unit properties must meet a minimum livable area between 600 and 750 square feet, depending on the lender. Properties below this range are considered too small for standard market comparability and are typically excluded by DSCR Loan programs.
For duplexes, triplexes, and fourplexes, DSCR Lenders typically require a minimum of 400 square feet per unit. This means each unit in the building must meet or exceed this square footage requirement to qualify. A single under-sized unit within an otherwise large enough property may disqualify the property entirely. While this industry-standard size minimum is already a relatively low bar to clear, there can be successful multi-unit properties with smaller units (or one small unit) below this minimum square footage, especially in markets such as New England with older and denser housing stock. While these properties are generally ineligible, they may be granted an exception in some cases, especially when all other loan metrics are strong.
Most DSCR Lenders require condo units to have at least 500 square feet of livable interior space. Smaller units are often excluded due to volatility in value, limited resale demand and heightened concerns over ability for full-time habitability and use. These standards apply to both warrantable and non-warrantable condos.
When condotel units are permitted under a DSCR Loan program, most lenders require a minimum condotel unit size between 500 and 600 square feet, though rules may vary by market. Condotel units may face some additional requirements as well, such as needing a full kitchen, bathroom and other aspects that would allow a tenant or buyer to live full time in the unit if needed, despite the main intention for most condotel units to be utilized as a short term or vacation rental.
For DSCR Lenders that offer expanded multifamily programs (beyond 4 units), the most common requirement is at least 400 square feet per unit. This mirrors the unit square footage requirements for 2–4 unit properties and helps ensure the property meets basic standards for residential use and valuation.
In DSCR Loan programs that allow limited mixed-use buildings, each residential and commercial unit is generally expected to meet the 400–500 square footage minimum, generally with no differentiation between residential and commercial units.
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