Can You Really Use a DSCR Loan for Fix-and-Flip Properties?

Introduction

While traditionally used to finance rental properties, will they fit into the fix-and-flip investing strategy? This is the common thought that investors perceive to be valid. However, the variations that appoint them not strictly short-term properties could make them useful in a handful of situations.

The guide explains whether a DSCR loan will help finance your next fix-and-flip, situations when it becomes an option, and what alternatives you should consider. 

DSCR Loans are Rarely Used for Fix-and-Flips

Having been laid out for properties generating rental income, lenders do not consider the borrower’s personal income but investigate whether the property’s cash flow suffices for the loan to be repaid. This type of financing is great for long-term rental investors; on the other side, short-term property flips become offset by the potential for returns.

However, there are exceptions in which the DSCR loan works with a fix-and-flip strategy, especially when rental income is considered in the investment philosophy. Knowing these odd facts will help any fixer-upper to see if this financing option matches their needs.

How DSCR Loans Differ from Traditional Loans

• No Personal Income Verification – Your W-2s or tax returns aren’t a factor.
• Property Cash Flow is Key – The loan approval depends on the rental income covering the debt.
• More Flexibility for Investors – Great for those with multiple properties or inconsistent personal income.

Typical DSCR Loan Requirements

• A DSCR of at least 1.25 (meaning the property is expected to generate 25% more than debt payments).
• Minimum credit score requirements, usually 640 or above.
• 20% to 25% down payment.
• Proof that the property generates rental income.

Since these loans prioritize rental income, how do they fit into fix-and-flip investing? Let’s explore the possibilities.

How Fix-and-Flip Investing Works

Fix-and-flip investing revolves around purchasing a distressed property, renovating it, and selling it for a profit. The goal is simple: buy, add value, and sell quickly. Here’s how it typically plays out:

• Find a property – Often below market value and in need of repairs.
• Secure financing – Typically short-term, like hard money loans.
• Renovate – Improve the property to boost resale value.
• Sell for profit – Flip it fast to avoid holding costs.

Common Fix-and-Flip Financing Alternatives

• Hard Money Loans – Short-term, expensive loans based on property value.
• Private Loans – From private persons.
• Bridge Loans – Short-term financing while waiting for a property to sell.
• HELOC Loans – Using home equity as funding for house flips.

DSCR loans usually are absent on this list because they are meant for properties that generate income. However, there are some strategic possibilities for the cases when their use is acceptable.

Can You Use a DSCR Loan for a Fix-and-Flip?

When a DSCR Loan Might Work for a Fix-and-Flip

In circumstances involving rental income, a DSCR loan can be better suited for fix-and-flip scenarios. Consider these cases:

• You Intend to Rent Before Selling (BRRRR Method): Buy, Rehab, Rent, Refinance, Repeat.
• Your Flip Takes Longer Than Expected: If the property generates rental income during delays, a DSCR loan offers stability.
• You Want to Convert to a Long-Term Rental: Instead of flipping, you might refinance with a DSCR loan and keep the property.
• Hybrid Approach: Combine DSCR loans with other financing.

Challenges with Using DSCR Loans for Fix-and-Flips

• Most Lenders Require Rental Income – If your property isn’t rented, it won’t qualify.
• Longer Loan Terms – DSCR loans typically have 30-year terms, while flips need short-term funding.
• Not Ideal for Distressed Properties – Lenders prefer properties that can generate income immediately.

To compare DSCR loans with other financing options, here’s a quick look:

When Should You Use a DSCR Loan for a Fix-and-Flip?

A DSCR loan could be a viable option if:

• You’re flipping a property that is already generating rental income.
• You plan to rent before selling.
• The lender offers flexible DSCR terms that suit a short-term strategy.
• You use a DSCR loan along with other financing methods.

When a DSCR Loan is NOT the Best Option

• You need quick cash to close a deal.
• You’re flipping a distressed property with no rental income.
• You don’t plan to hold the property beyond a few months.

Final Thoughts

Such loans are typically issued for commercial or multi-family units. When a fix and flip is long-term, short-term financing options such as hard money or bridge loans work better, particularly for those who intend to sell their properties within less than one year after purchase. But if one intends to hold a property for rental before selling, a DSCR loan will no doubt play a critical role in a financing strategy.  

Before deciding, ask yourself:

• Does my property generate rental income?
• Am I planning to hold it for more than a few months?
• Can I meet DSCR loan requirements?

If the answer is yes, a DSCR loan might work for your project. Otherwise, look for a faster, short-term financing method.

Looking for a reliable funding partner? Munshi Capital offers competitive DSCR and hard money loan options to help investors secure fast financing for fix-and-flip projects.