DSCR Loan Structures: 30-Year Fixed vs 5/6 and 7/6 ARMs vs the 40-Year Balloon

Two term sheets on the same property, same borrower, same 75% LTV: one at 8.00% on a 30-year fixed, one at 7.35% on a 7/6 ARM. Most borrowers read that as a 65-basis-point discount and take it or leave it on price alone. That is the wrong frame. The 65 bps is compensation for accepting reset risk seven years out, and whether it is a good trade depends almost entirely on how long the property is being held and what the prepayment structure does to the exit.

Structure is the part of a DSCR term sheet that gets the least attention and moves the most money.

The four structures actually being written

The DSCR market has consolidated around a small menu, and nearly every non-QM lender writes some version of all four.

The 30-year fully amortizing fixed is the default. Rate holds for the full term, no reset, no balloon. Current market for a 1.20-plus ratio, 740-plus FICO, 75% LTV purchase runs roughly 7.25 to 8.25%.

The 30-year fixed with a 10-year interest-only period prices 12 to 25 bps above the fully amortizing note but produces a materially lower payment for a decade, then recasts to a 20-year amortization schedule. This is the single most common structure on files that are close to the ratio line.

Hybrid ARMs — 5/6 and 7/6, meaning a fixed period of five or seven years followed by semiannual resets — price 40 to 90 bps below the comparable fixed. The 5/6 carries the deeper discount, generally 60 to 90 bps; the 7/6 lands around 35 to 60.

The 40-year fixed with a 10-year IO period is the leverage-maximizing structure. The extended amortization after the IO period drops the recast payment meaningfully, and it typically prices 25 to 50 bps above a 30-year fixed. Some shops write a 30/5 or 30/7 balloon instead — amortized on a 30-year schedule but due in full at year five or seven — which is a different animal entirely and needs to be read carefully.

What the ARM discount is actually paying you for

The discount exists because the lender is not holding 30-year rate risk. On a 7/6 ARM the loan reprices to an index plus margin in year eight, so the securitization buyer is exposed to seven years of duration rather than thirty. That is worth 40 to 60 bps in the capital markets, and the borrower gets most of it passed through. The full mechanics of how rate sheets get built out of securitization spreads are covered in where DSCR rates come from, and the ARM discount is one of the cleanest examples of a capital-markets input landing directly on an investor's term sheet.

The exposure the borrower takes on is real but bounded. Post-reset, the rate is typically 30-day average SOFR plus a margin of 3.50 to 4.75%, subject to caps. Standard caps are 2/1/5 — 2% at the first adjustment, 1% at each subsequent semiannual adjustment, 5% lifetime over the start rate. A 7.35% start rate with a 5% lifetime cap can reach 12.35% in a severe scenario, which is the number to underwrite against, not the start rate.

Run that worst case against the property. A $240,000 loan at 7.35% amortizing is $1,653 a month. At the 12.35% lifetime cap it is $2,538. On a property renting $2,300 with $600 of taxes and insurance, DSCR goes from 1.02 to 0.73. That is not a rate problem, it is a solvency problem, and it is why the lifetime cap belongs in the model before the ARM gets signed.

Structure changes the ratio, not just the payment

Underwriters calculate DSCR off the actual note payment, which means the structure choice feeds directly back into approval.

Take a $300,000 loan with $2,850 in gross rent and $700 in monthly taxes, insurance, and HOA. At 8.00% on a 30-year fixed, principal and interest is $2,201, PITIA is $2,901, and DSCR is 0.98 — a decline at most shops. The same loan at 8.15% interest-only is $2,038, PITIA $2,738, DSCR 1.04. On a 7/6 ARM at 7.35% amortizing, P&I is $2,066 and DSCR is 1.03. On a 40-year fixed with 10-year IO at 8.40%, P&I is $2,100 and DSCR is 1.02.

Every one of those variants clears a 1.00 minimum that the 30-year fixed misses. None of them changed the property, the rent, or the borrower. The interaction between payment structure and qualifying ratio is worked through in more depth in the interest-only DSCR guide, and the same arithmetic applies to the ARM path. Before committing to a structure, run all four through the DSCR ratio calculator with the real tax and insurance lines — the ranking flips more often than borrowers expect.

Where structure matters most by market

The lower the rent-to-price ratio, the more structure does. In a market like Tampa, where insurance premiums of $3,200 to $5,000 a year on a $350,000 single-family already compress the ratio, the difference between a 30-year fixed and a 10-year IO is frequently the difference between an approval and a decline. Structure is doing the work that the property cannot.

In a genuine cash-flow market — Indianapolis rentals at 0.85 to 1.0% monthly rent-to-price with property taxes capped at 2% of assessed value under Indiana's constitutional cap — the ratio clears at 1.25 or better on a plain 30-year fixed. There the ARM discount is pure cost savings rather than a qualification tool, and the analysis is simply hold-period math.

Texas sits in a third category: no state income tax, no transfer tax, but effective property tax rates of 1.8 to 2.5% that squeeze the ratio hard. The interplay of tax burden, prepay enforceability, and entity rules across markets is mapped in the state-level DSCR rules, and structure decisions should be made after those inputs are known, not before.

The balloon is not an ARM and should not be treated like one

A 30/5 balloon amortizes on a 30-year schedule and comes due in full at month 60. There is no reset, no cap structure, no continuation. The borrower must refinance or sell, and if credit is tight in that window, neither may be available on acceptable terms.

An ARM, by contrast, resets and keeps going. A borrower who cannot refinance a 7/6 in year eight simply pays the adjusted rate. That optionality is worth a great deal and is the reason a 7/6 at 7.60% is usually a better instrument than a 30/5 balloon at 7.35%, despite the worse headline number. Read the note for the words "due and payable" — some lenders market balloons using ARM-adjacent language.

Prepay structure interacts with the note structure

The prepayment penalty and the rate structure have to be chosen together. A 5-year 5-4-3-2-1 step-down on a 5/6 ARM means the penalty expires the same month the rate starts floating, which is clean. The same step-down on a 7/6 leaves two penalty-free years before the reset, which is also fine. But a 3-year step-down paired with a 30-year fixed on a property the borrower intends to hold indefinitely is paying for flexibility that will never be used — typically 25 to 50 bps in rate for nothing. The full prepayment penalty breakdown covers which states restrict enforcement and where the step-down can be bought down cheaply.

The general rule: match the penalty period to the shorter of the intended hold and the fixed period. Paying for a shorter penalty than the hold requires is waste; a longer one is a trap.

Matching structure to hold period

A hold of three to five years — a value-add repositioning, a build-to-rent phase intended for bulk sale, a market the borrower expects to rotate out of — points to the 5/6 ARM with a matching 3-year prepay. The discount is captured, and the reset never arrives.

A hold of six to ten years points to the 7/6 with a 5-year step-down, provided the lifetime cap scenario still clears roughly 0.85 DSCR. If it does not, the ARM is a leveraged bet on rates rather than a financing decision.

An indefinite hold — the buy-and-hold portfolio, the retirement income property — points to the 30-year fixed, with the IO variant used only if the ratio requires it. Paying 40 to 65 bps for permanent certainty on an asset that will never be sold is generally the right trade.

Program menus vary more than borrowers expect: plenty of shops write only 30-year fixed and IO, some price ARMs aggressively, and only a subset offer the 40-year. Sorting out which lenders write which structures before going under contract is worth an hour of comparison across the DSCR lender directory, and the underlying qualification math is the same in every case — the standard DSCR calculation does not change, only the payment plugged into it does.