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in San Jose, CA
San Jose real estate investors face a key decision: conventional financing or DSCR loans. Your choice depends on whether you're buying a primary residence or rental property, and how you want to qualify.
Conventional loans use your personal income and credit to determine eligibility. DSCR loans qualify you based on the rental property's cash flow instead. Both options serve distinct purposes in the San Jose market.
Understanding these differences helps you choose the right financing strategy. The best option depends on your investment goals, income documentation, and property type.
Conventional loans work through standard underwriting that examines your income, employment, credit score, and debt-to-income ratio. Lenders verify your W-2s, tax returns, and pay stubs to confirm you can afford the monthly payment.
These loans typically offer the lowest rates for well-qualified borrowers. You'll need a credit score of at least 620, though scores above 740 get better pricing. Down payments start at 3% for primary homes but require 15-25% for investment properties.
Loan limits in Santa Clara County are higher than standard conforming limits, accommodating San Jose's elevated property values. You can finance up to 10 properties with conventional financing if you meet all qualification requirements.
DSCR loans evaluate the property's ability to cover its own debt rather than your personal income. Lenders calculate the debt service coverage ratio by dividing monthly rental income by the total monthly housing payment.
A DSCR of 1.0 means rent exactly covers the mortgage payment. Most lenders want to see ratios above 1.0, though some accept lower ratios with larger down payments. You don't provide tax returns or employment verification.
These loans work well for self-employed investors, those with complex tax strategies, or buyers purchasing multiple properties quickly. Down payments typically range from 20-25%. Interest rates run higher than conventional loans but offer more flexible qualifying.
The fundamental difference lies in how you qualify. Conventional loans require proof of personal income, while DSCR loans only care about the property's rental income. This makes DSCR loans ideal when your tax returns don't reflect your true earnings.
Interest rates differ significantly. Conventional loans offer lower rates but strict income documentation. DSCR loans charge higher rates in exchange for qualifying flexibility. Rates vary by borrower profile and market conditions.
Property use matters. Conventional loans work for primary homes, second homes, and investment properties. DSCR loans exclusively finance rental properties. You cannot use DSCR financing for a home you plan to occupy.
Down payment requirements shift based on property type with conventional loans. DSCR loans maintain consistent down payment requirements regardless of how many properties you own, making them advantageous for portfolio growth.
Choose conventional loans when buying a primary residence or when your income documentation is straightforward. W-2 employees with strong credit and stable employment history typically get the best terms with conventional financing.
DSCR loans make sense for self-employed borrowers, investors buying multiple properties, or anyone whose tax returns show low income due to deductions. They work well when rental income is strong but your personal debt-to-income ratio is maxed out.
San Jose investors often use both strategically. Start with conventional financing for your first few rentals to secure lower rates. Switch to DSCR loans as your portfolio expands and conventional loan limits become restrictive.
Consider closing timeline too. DSCR loans often close faster since they require less documentation. If you're competing for a San Jose rental property in a tight market, quicker closing can strengthen your offer.
Yes, DSCR loans work for first-time investors as long as the property generates rental income. You don't need previous landlord experience, just a property with strong rental potential.
Conventional loans typically offer lower rates for qualified borrowers. DSCR loans charge higher rates due to their flexible qualifying requirements. Rates vary by borrower profile and market conditions.
No, DSCR loans don't appear on your personal debt-to-income calculations. This lets you keep conventional financing available for primary residences while building a rental portfolio.
Yes, you can refinance between loan types. Investors often refinance conventional loans to DSCR to free up qualifying capacity, or switch to conventional for lower rates when income documentation improves.
Conventional loans require minimum 620 credit scores, with 740+ getting best pricing. DSCR loans typically need 660-680 minimum scores, varying by lender and down payment amount.