If you’re considering a DSCR loan (Debt Service Coverage Ratio loan) for your next investment property, you’ve likely heard about the benefits—no personal income verification, flexible terms, and qualification based on rental income. But even the best DSCR loan program can have hidden surprises that catch new and experienced investors off guard.

Before you apply, here are five unexpected DSCR loan challenges you’ll want to prepare for—so you can protect your cash flow and avoid costly mistakes.

Here are the 5 DSCR Loan Surprises You Want to Avoid:

1. Higher Than Expected Insurance Costs

Many DSCR loan programs require more than just basic homeowner’s insurance. You may need:

• Rent loss coverage equal to six months of qualifying rent.

• Liability coverage of at least $100,000.

If you’re buying in risk-prone states—like Florida (hurricanes) or California (wildfires)—insurance costs can be significantly higher. Flood zones may require additional coverage.

Tip: Always get a local insurance quote before locking in your DSCR loan. Underestimating this expense can turn a positive cash flow property into a negative one.

2. Higher Property Taxes Than You Planned

One hidden risk in many DSCR loan programs is property tax reassessment after purchase. In states like California, this can mean a sharp jump in your annual taxes once the title transfers.

States with no income tax often have higher property taxes to compensate. Don’t rely solely on the seller’s current bill—get estimates from local tax collectors or real estate pros to avoid sticker shock.

3. Lower Than Expected Rental Income

Your DSCR loan approval is heavily tied to rental income, but appraisers determine this based on comparable properties. If the comps are weak—or the appraiser uses a single outlier—you could be approved for a lower loan amount than expected.

What to do:

• Verify rents against three to five comparable properties from the last six months.

• Compare properties that match in size, condition, and location.

• Work with a real estate agent who knows the rental market.

4. Prepayment Penalties That Limit Your Options

Many DSCR loan programs include prepayment penalties—fees charged if you refinance or sell within a set time. These can follow a “step-down” structure (5% in year one, 4% in year two, etc.) or stay fixed for several years.

Longer penalties often mean lower interest rates, but they can limit your ability to refinance if rates drop. Always ask your lender to clearly explain your prepayment terms before you sign.

5. Higher Closing Costs and Reserve Requirements

Closing costs for DSCR loans often surprise investors—especially when factoring in state-specific fees.

• Example: Florida’s transfer tax is $0.70 per $100 of the purchase price.

• Lenders may require three to six months of reserves, and retirement account balances are sometimes discounted in reserve calculations.

Be sure to budget for:

• Upfront homeowner’s insurance payment.

• Transfer taxes and recording fees.

• Additional reserve requirements based on your DSCR loan program.

Final Takeaway

A DSCR loan can be a powerful financing tool for real estate investors—offering flexibility, LLC-friendly terms, and no personal income verification. But every DSCR loan program has its own rules, fees, and requirements.

By understanding these five common DSCR loan surprises—insurance costs, property taxes, rental income calculations, prepayment penalties, and closing cost expectations—you can plan ahead, protect your returns, and keep your investment strategy on track.

If you’d like personalized guidance on finding the right DSCR loan program for your property and goals, schedule a consultation.