Commercial Mortgage vs. DSCR Loan for 5+ Unit Properties

You've found the perfect 5+ unit multifamily property. It's a major step in scaling your real estate portfolio, but how do you finance it?

Once a property has five or more units, traditional residential financing is no longer an option. This pushes investors into commercial lending, where they face two paths: a traditional commercial mortgage from a bank or a modern Debt Service Coverage Ratio (DSCR) loan designed for investors.

Both can finalize the deal, but they operate on different principles. This guide will break down the differences between a commercial mortgage and a DSCR loan for 5+ units, helping you understand why for most modern investors, the DSCR loan is the faster, smarter, and more flexible path to building wealth.

Why 5+ Units Change the Lending Game

The transition from 4 to 5 units represents a fundamental shift in how lenders view your property. Conventional loans backed by Fannie Mae and Freddie Mac are only available for properties with 1-to-4 residential units. This "1-4 unit rule" has been the cornerstone of residential lending for decades, offering predictable terms and standardized qualification requirements.

Lenders classify any residential property with five or more units as commercial real estate. This means the financing rules change completely. Instead of fitting into Fannie Mae's residential lending boxes, you now have access to more flexible multifamily financing options designed for real estate investor loans. At theLender, we finance properties up to 8 units with our investor-focused DSCR programs that treat your rental income as your primary qualification.

What is a Traditional Commercial Mortgage?

Traditional commercial mortgages represent the "old-school" approach to financing investment properties. This approach works against the modern investor's goals of speed, flexibility, and portfolio scaling.

Banks use "global cash flow analysis" for commercial mortgage applications, scrutinizing your financial life and treating the property's income as one piece of a larger puzzle. They'll examine your personal income through W-2s and paystubs, calculate your personal Debt-to-Income (DTI) ratio, and require multiple years of personal and business tax returns.

Beyond personal finances, they will analyze the financial health of any other businesses you own, review your personal credit history, and evaluate how this new property fits into your overall debt structure. The property's rental income is considered, but it's weighted against your global financial picture rather than evaluated on its own merit as a cash-flowing investment property.

The Paperwork Mountain: Required Documentation

The documentation requirements for traditional commercial loans can be overwhelming:

• 2-3 years of personal tax returns (all pages and schedules)
• 2-3 years of business tax returns (if applicable)
• Year-to-date Profit & Loss (P&L) statements and balance sheets
• Personal Financial Statement (PFS) with detailed asset and liability breakdown
• Detailed schedule of real estate owned (REO) with rental income analysis
• Business debt schedules for all entities
• Personal and business bank statements (typically 3-12 months)
• Rent rolls and lease agreements for all owned properties
• Environmental reports and property condition assessments

Pros and Cons of a Traditional Commercial Loan

Pros:

• Can offer competitive interest rates for qualified borrowers.
• May offer larger loan amounts for well-qualified applicants
• Established relationships can lead to better terms over time.

Cons:

• Incredibly slow process (60-90+ days to close)
• Rigid underwriting requirements with little flexibility
• Extremely difficult for self-employed investors or those with complex income.
• Includes restrictive loan covenants that limit future borrowing.
• May limit the number of properties you can finance
• Requires extensive documentation that many investors find burdensome.

What is a DSCR Loan?

DSCR loans are the modern solution for real estate investors who understand that rental income should qualify investment property loans.

The Underwriting Focus

A Debt Service Coverage Ratio (DSCR) loan operates on a simple principle: "Your Rental Income is Your Qualification." The formula for calculating DSCR is: DSCR = Gross Monthly Rental Income / Monthly PITIA (Principal, Interest, Taxes, Insurance, and Association dues).

In plain English, DSCR means if the property's rent covers the mortgage payment, the loan qualifies. A ratio of 1.0x means the rent exactly covers the payment, while ratios above 1.25x often qualify for better terms. This non-QM mortgage approach recognizes that successful real estate investing is about cash flow, not personal W-2 income.

The key difference that makes DSCR loans revolutionary for investors is that no personal income is used to qualify. No W-2s, no tax returns, no 4506-C transcript requests from the IRS. The property's ability to generate rental income takes precedence, which is how investment property financing works.

Streamlined & Simple: Required Documentation

The documentation requirements for a DSCR loan are simple:

• Purchase Contract (for purchases) or current mortgage statement (for refinances)
• A licensed appraiser completed Lease Agreements or a Rental Schedule (Form 1007)
• Bank statements (typically 2 months) to verify funds for down payment and reserves
• If purchasing in an LLC, S-Corp, or other business structure, provide entity documents.
• Property management agreement (if applicable)

The stark difference in complexity compared to traditional commercial loans means faster processing and fewer delays.

Pros and Cons of a DSCR Loan

Pros:

• Extremely fast closings (often 30 days or less)
• Ideal for self-employed investors and portfolio builders
• You can finance an unlimited number of properties.
• Encourages LLC vesting for asset protection
• Qualification is straightforward and based on the property's merit.
• No complications with income verification loans
• Ideal for loans on properties with 5 to 8 units

Cons:

• Interest rates for A+ borrowers may be higher than top-tier bank loans.
• Requires a personal guarantee (full recourse loan)
• Down payment requirements may be higher than those of some commercial loans.

Best DSCR Lender for Multifamily Properties

The first step is understanding the DSCR loan advantage. The second step is partnering with a lender who has perfected it. At theLender, we've funded over $3 billion in DSCR loans since 2019 because we built our process for investors like you.

• Finance Like an Investor, Not a Homeowner: We understand you care about cash flow, not W-2s. Our NONI (No Income) and NearNONI DSCR programs are built on this principle. We specialize in exploring our NONI DSCR loan programs for single-family homes to 8-unit properties, giving you the flexibility to scale your multifamily financing portfolio.
• Scale Without Limits: Ready to grow beyond one property? Our unique "theBlanket" portfolio loan program lets you finance 3-25 properties under a single loan, simplifying portfolio management and reducing the administrative burden of multiple mortgages.
• Speed is Your Competitive Advantage: In today's fast-moving real estate market, a 90-day close from a traditional bank means losing the deal to a cash buyer or faster competitor. With our streamlined process and dedicated single point of contact, we consistently close DSCR loans in 30 days or less.

Standard Features for Investors:

• No Lender Fees: Saving you thousands at closing on many products.
• Flexible Entity Vesting: We welcome flexible entity vesting options including layered LLCs, S-Corps, and trusts for your asset protection strategy.
• First-Time Investors Welcome: You don't need a massive portfolio to start. We finance first-time investors who understand DSCR's impact on your investment strategy.
• Generous Seller Concessions: Use up to 6% (existing construction) or 9% (new construction) in seller concessions to cover closing costs or prepay HOA dues.
• Proven Multifamily Track Record: Our loan officers are experts at structuring deals for 5-8 unit properties. We see your property’s potential and have the tools and experience to make complex deals happen when other lenders fail.

FAQs

Q: Can I use a DSCR loan for a 6-unit or 8-unit building?

A: Absolutely. TheLender's DSCR programs are designed for properties with up to 8 residential units, while many lenders stop at 4 units or require full commercial lending processes. This makes us the perfect partner for small to mid-size multifamily financing needs, bridging the gap between residential and large-scale commercial lending.

Q: What if some units are vacant? How is rent calculated?

A: We don't rely on current leases, giving you flexibility with value-add properties. A licensed appraiser will complete a comprehensive market rent schedule (Form 1007/216) to determine the property's full rental potential based on comparable rents. We underwrite based on these rents, allowing you to finance properties needing minor improvements or with temporary vacancies.

A: A personal guarantee is often required for LLC financing for real estate.

A: Yes. Our DSCR loans are full recourse loans requiring a personal guarantee from the principal owners (typically 25% or more ownership). While this means personal liability, it ensures competitive rates and terms because we partner with serious, committed real estate investors.

Q: What is the minimum credit score?

A: Credit score requirements vary by program, loan-to-value ratio, and property type. A key advantage at theLender is that we use the highest middle FICO score among all borrowers on the loan application. This means if you're married or have business partners, we'll use the best credit score, helping you qualify for better rates and terms.

Q: How do DSCR loans work for short-term rentals like Airbnb properties?

‍

A: theLender is one of the few lenders that truly understands short-term rental (STR) properties. We have specific guidelines for Airbnb, VRBO, and other STR platforms, using actual rental history or market rental studies to determine income potential. This expertise in the STR space sets us apart from traditional commercial lenders who often avoid these property types entirely.

Conclusion

Choosing between a traditional commercial mortgage and a DSCR loan for your 5+ unit property depends on your priorities: the bank's slow, paperwork-heavy process or an investor-centric model designed for speed, flexibility, and cash flow optimization. For the modern real estate investor looking to build and scale a portfolio efficiently, the answer is clear.

The choice between a commercial mortgage and a DSCR loan for 5+ units depends on your long-term investment strategy. Traditional banks impose portfolio limits and relationship requirements that constrain your growth. DSCR loans from specialized lenders like theLender grow with you from your first 5-unit property loan to a diverse multifamily portfolio.