DSCR Construction Loan vs. Hard Money: How to Save $20,000 or More on Your Next Build
If you’re financing a ground-up construction project or full gut renovation with a hard money loan, there’s a real chance you’re leaving $20,000 to $30,000 on the table in unnecessary fees and closing costs. Here’s why that happens and what to use instead.
The True Cost of the Hard Money Route
The standard playbook for building a rental property looks like this: take out a hard money loan, close on the property, complete construction, then refinance out into a 30-year fixed DSCR or conventional loan. It sounds straightforward — but look at what it actually costs on a $500,000 project.
At purchase with the hard money loan: Hard money lenders typically charge 2–3% in origination fees and discount points, plus standard closing costs. On a $500,000 deal, that’s roughly $10,000–$15,000 just to get into the loan — before factoring in the 9–12% interest rate you’ll pay while construction is underway.
At refinance after completion: When you refinance out of the hard money loan into a DSCR or conventional loan, you pay nearly identical closing costs all over again — another 2–3% in origination fees plus title, escrow, and other transaction costs. Another $10,000–$15,000 out of pocket.
Total: $20,000–$30,000 in combined closing costs, plus elevated interest rates during the entire construction period. That’s the real cost of the two-loan approach most investors default to.
The Alternative: DSCR One-Time Close Construction Loan
The one-time close DSCR loan bundles the construction financing and the permanent 30-year fixed DSCR loan into a single transaction with a single closing. You pay one set of closing costs — not two. And the interest rate during construction is significantly lower than a hard money loan.
Here’s how the process works:
- You close on the property like a normal transaction
- After closing, funds are disbursed to your builder or general contractor in a series of draws — typically up to 10 draws throughout the construction timeline
- Once construction is fully complete, the loan automatically modifies from the construction phase into a permanent 30-year fixed DSCR loan — no refinance, no second closing, no second set of fees
The DSCR component works the same way as any DSCR loan — no personal income verification, no tax returns, no W2s. The lender underwrites based on what the property will rent for once construction is complete, comparing that projected rental income to the PITI payment. The target is typically a 1.15 DSCR ratio.
The Appraisal Is Based on Plans and Specs
Because the property doesn’t exist yet, the appraiser evaluates the project based on the plans and specifications — what the property will be worth and what it will rent for once fully built. They produce a 1007 rent schedule based on comparable completed properties in the area, which determines the DSCR ratio used for underwriting.
You can qualify using either long-term or short-term rental income depending on the market. In a vacation market like Sedona, Arizona, short-term rental projections can come in close to double the long-term rental figure — making it much easier to hit the required ratio.
If You Already Own the Land
This is where the program gets especially powerful. If you already own the land outright and have held it for at least six months, you can use that equity dollar-for-dollar to cover the full down payment and closing cost requirement. In some cases, investors have closed on this program without bringing a single dollar to the table beyond the appraisal fee — the land equity covered everything.
If you’re purchasing the land as part of the project, the full cost — land plus construction — gets bundled into the loan with a standard 25% down payment.
Qualification Requirements
- 720+ credit score — ideally. Terms vary based on credit.
- 25% down payment — or land equity that covers it
- Rental management experience within the past 36 months — this program is designed for experienced investors, not first-time buyers
- No personal income verification — qualifies like any DSCR loan
Side-by-Side: Hard Money vs. One-Time Close DSCR
Hard money route:
- Two sets of closing costs ($20,000–$30,000 total on a $500K project)
- Interest rates of 9–12% during construction
- Must re-qualify for a new loan after completion
- Anxiety about whether the exit refinance will go smoothly
One-time close DSCR:
- One set of closing costs
- Rate comparable to a standard DSCR loan — no hard money premium
- Loan modifies automatically — no re-qualification needed
- No income documentation at any stage
FAQ
What is a DSCR one-time close construction loan? It’s a loan that combines construction financing and a permanent 30-year fixed DSCR loan into a single closing. When construction is complete, the loan converts automatically — no refinance required.
How much can I save compared to using a hard money loan? On a $500,000 project, the savings in closing costs alone typically range from $15,000 to $30,000, plus the savings from a lower interest rate during the construction phase compared to hard money rates of 9–12%.
Can I use land I already own as the down payment? Yes. If you’ve owned the land for at least six months, its full value can be applied toward the down payment and closing costs — potentially eliminating the need to bring any cash to the table.
What DSCR ratio is required for this program? Typically 1.15, based on projected rental income after construction is complete.
Can I use short-term rental income to qualify? Yes. The lender can order a short-term rental appraisal, which in vacation markets can produce income projections nearly double what a long-term rental analysis would show.
Is this program available for first-time investors? No. You need at least some rental management experience within the past 36 months to qualify.
Building a rental property and want to avoid the hard money trap? Reach out and let’s look at whether the one-time close DSCR program fits your project. Austin Clarence | NMLS #1509690 | (602) 737-2576 | aclarence@nexamortgage.com