- The standard structure is 10 years (120 months) of interest-only. Then the unchanged balance amortizes over the 20 years left on a 30-year loan, or 30 years on a 40-year loan (LoanStream, Pennymac, FundLoans, Easy Street, Spring EQ).
- Lenders that publish their method qualify on the interest-only payment, ITIA instead of PITIA: FundLoans, Pennymac, LoanStream, Easy Street and Total Quality Lending. Consumer mortgages must qualify on the recast payment; business-purpose loans fall outside that rule.
- Interest-only costs leverage, credit and price: a 75% LTV cap at FundLoans, ACC Mortgage, Total Quality Lending and Pennymac, 680–700 minimum scores at three of them, and 0.250–0.750 points on Spring EQ's October 30 sheet.
- On a $375,000 loan at 7.5% with $2,950 of rent, interest-only is $2,343.75 a month against $2,622 amortizing, which lifts the DSCR from 0.94 to 1.04.
- In month 121 the same loan's payment rises to $3,021 on a 30-year term (29% more) or $2,622 on a 40-year term (12% more), with the full $375,000 still owed.
An interest-only DSCR loan lets you pay just the interest for the first part of the term, most often 10 years, before any principal is due. A DSCR (debt service coverage ratio) lender approves you on the rent divided by the monthly payment, and the lenders that publish their method put the interest-only payment in that ratio. A smaller payment means a higher ratio, which can decide whether you get the loan size you want. The catch comes when the interest-only period ends and the payment resets to repay the whole balance over the years that remain. This guide covers the mechanics, the ratio math, the terms lenders published in October 2026 and a worked example through month 121.
How an interest-only period works
During the interest-only period, each payment covers that month's interest and nothing else, so the balance doesn't move. When the period ends, the loan recasts: the lender works out a fully amortizing payment on the same balance over the months left in the term.
Two structures dominate the published matrices. A 30-year loan with 10 years interest-only leaves 240 months to repay everything. A 40-year loan with 10 years interest-only leaves 360, so it recasts to the same payment as an ordinary 30-year loan, which makes it the gentler of the two. Adjustable-rate versions add a second date to watch: on a 5/6 or 7/6 ARM with 10 years of interest-only, the rate starts adjusting in year 6 or 8, before amortization begins in year 11.
Interest-only DSCR terms lenders published, October 2026
| Lender (date) | IO structure | Limits | Ratio calculated on |
|---|---|---|---|
| LoanStream (matrix Oct 8, 2026) | 30-year fixed: 120 months IO, then 240 amortizing. 40-year fixed: 120 IO, then 360. 5/6 and 7/6 ARMs with IO | Its IO row lists a 640 minimum score and 80% maximum LTV | The IO payment, in all states; reserves also sized on it |
| Pennymac correspondent (profile Oct 22, 2026) | 30- or 40-year fixed with 10 years IO; 5/6, 7/6 and 10/6 ARMs with 10 years IO and 20 amortizing | 700 minimum score; 75% LTV at a ratio of 1.00+, 70% at 0.75+; not on no-ratio loans | The interest payment at the note rate, plus taxes, insurance and dues |
| FundLoans Spectrum (matrix Aug 1, 2026) | 120 months IO; 30- and 40-year fixed, 5/6 and 7/6 ARM | 75% maximum LTV; ratio of 0.75 or more | ITIA |
| ACC Mortgage (matrix Oct 1, 2026) | 30-year and 40-year fixed IO | 75% purchase and rate-and-term, 70% cash-out; 680 minimum score | Not stated in the matrix |
| Total Quality Lending (Oct 30, 2026) | Not published | 680 minimum score; 75% maximum LTV | ITIA |
| Easy Street Capital (Oct 2026) | First 10 years IO, then 20 years amortizing | Not published | The IO payment |
| Spring EQ (rate sheet Oct 30, 2026) | 30-year fixed: 10 years IO, then 20 years amortizing | 0.250–0.750 points, rising with LTV | Not stated on the rate sheet |
| Kiavi, Lima One, LendingOne, RCN, Angel Oak, Griffin | IO offered; structure not published | Not published | Not published |
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The pattern is clear enough to plan around: 10 years of interest-only is the market standard, LTV tops out near 75%, and score floors run from 640 to 700. The same lenders' amortizing loans go to 80% LTV or more and start at scores of 620–660.
How lenders calculate DSCR on an interest-only loan
Five lenders in the table say they qualify on the interest-only payment. Pennymac's profile spells out the detail: the qualifying payment is the interest at the qualifying rate plus one-twelfth of annual taxes, insurance and dues, and the qualifying rate is the note rate on fixed and adjustable loans alike. The one exception is Minnesota ARMs, which use the higher of the note rate and the fully indexed rate. LoanStream qualifies on the IO payment in every state and sizes reserves on it too, so the dollar amount of reserves you hold shrinks as well.
That's looser than the standard for a home you'd live in. Under the federal ability-to-repay rule, a lender qualifying a consumer interest-only mortgage must use the payment that repays the loan over the term left once it recasts (Regulation Z, 12 CFR 1026.43(c)(5)(ii)(B)). DSCR loans sit outside that rule. Regulation Z doesn't cover credit extended mainly for business purposes, and the CFPB's official interpretation deems credit to buy or improve a rental the owner doesn't occupy to be business purpose. Pennymac's profile notes that its DSCR loans aren't subject to the general ability-to-repay standards. In practice, at these lenders an interest-only DSCR loan is approved on the payment you'll make in year one, not the one you'll make in year eleven.
Not every lender stops at year one. OfferMarket's June 2026 guide says it qualifies on ITIA for the initial approval and stress-tests the payment after the interest-only period. Ask which payment the lender uses, and whether it checks the recast payment as well.
Worked example: one $375,000 loan, three structures
Take a $500,000 single-family rental bought with 25% down: a $375,000 loan at an illustrative 7.5%, $2,950 a month of rent, $350 a month of property taxes and $150 of insurance, no HOA.
| Structure | P&I, years 1–10 | Qualifying payment | DSCR | Balance after 10 years |
|---|---|---|---|---|
| 30-year, fully amortizing | $2,622 | $3,122 | 0.94 | $325,481 |
| 40-year, fully amortizing | $2,468 | $2,968 | 0.99 | $352,934 |
| 30- or 40-year with 10 years IO | $2,343.75 | $2,843.75 | 1.04 | $375,000 |
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Against a 1.00 minimum, only the interest-only version qualifies at this loan size. A lender that sized the loan on the 30-year amortizing payment would stop at about $350,400, and you'd bring roughly $24,600 more to closing. The 40-year amortizing loan falls just short at 0.99.
The cost shows up in the balance. After 10 years the 30-year amortizing loan is down to $325,481: $49,519 of your payments became equity. The interest-only loan still owes all $375,000. Over those 10 years you'd pay $281,250 of interest on it, against $265,128 on the amortizing loan. Spring EQ's October 30 sheet would also charge 0.500 points for interest-only at 70–75% LTV, $1,875 on this loan.
Month 121: when the payment jumps
| Term | P&I, years 1–10 | P&I from month 121 | Increase | Rent needed for a 1.00 ratio |
|---|---|---|---|---|
| 30 years (10 IO + 20 amortizing) | $2,343.75 | $3,021 | +$677 (29%) | $3,521 |
| 40 years (10 IO + 30 amortizing) | $2,343.75 | $2,622 | +$278 (12%) | $3,122 |
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On the 30-year version, rent has to reach $3,521 by year 11, 19% above today's $2,950, just to keep the ratio at 1.00, and any rise in taxes or insurance pushes that figure higher. The 40-year version needs $3,122. On a fixed rate you know the new payment to the dollar on closing day, so there's no excuse for it to be a surprise. Your choices when it arrives:
- Pay the new amount. Build it into your hold plan from the start, including the rent you'd need to keep positive cash flow.
- Refinance before the reset. By year 10 a typical 5-year prepayment penalty is long gone, but you'll refinance at whatever rates and terms exist then, against the full original balance. At today's illustrative 7.5%, a new 30-year loan on $375,000 costs $2,622 a month.
- Pay principal early. Extra payments shrink the balance the recast is based on. Read the note first: eLEND's flat prepayment penalty applies to partial prepayments as well as payoffs during the penalty period.
- Sell before year 10. Then the reset may never arrive, and the prepayment penalty matters more than the recast. DSCR prepayment penalties covers how those are structured.
On an interest-only ARM, the first jump can arrive sooner. Pennymac's 7/6 interest-only ARM is fixed for 7 years, then adjusts every 6 months off the 30-day average SOFR plus a 5.00% margin, and its 5-1-5 caps let the first adjustment add up to 5 percentage points. On this loan, a 5-point rise from 7.5% would lift the interest-only payment from $2,343.75 to $3,906.25 in year 8, three years before amortization even starts. That's the cap's worst case, not a forecast, but it's the number to plan against.
What interest-only costs
- Price. 0.250–0.750 points on Spring EQ's October 30, 2026 sheet, rising with LTV. OfferMarket's June 2026 guide cites +0.125% in rate as an example of the premium.
- Leverage. 75% LTV at FundLoans, ACC Mortgage, Total Quality Lending and Pennymac (for ratios of 1.00 or more), against 80% for amortizing loans on the same matrices. Pennymac drops to 70% when the ratio is between 0.75 and 1.00.
- Credit. 680 at ACC Mortgage and Total Quality Lending and 700 at Pennymac, where their amortizing loans start at 640–660. DSCR loan credit score shows the rest of the tiers.
- Lifetime interest. Over the full term, the 30-year interest-only loan in the example pays $631,284 of interest against $568,940 fully amortizing, about $62,300 more. The 40-year interest-only version pays $850,190.
- Equity. With no principal paid, your equity comes only from the down payment and any change in value. Sell or refinance in year 5 and you owe $375,000, against $354,815 on the amortizing loan.
When interest-only makes sense, and when it doesn't
- It makes sense when the ratio sits just under the lender's minimum and interest-only clears it without more cash down, as in the example.
- It makes sense when you plan to exit or refinance before year 10 and would rather keep cash flow now than pay down a loan you'll retire early anyway.
- It makes sense when you'd rather choose where principal goes. The lower required payment leaves room for reserves or the next down payment, and you can still prepay this loan if the note allows it without penalty.
- It doesn't when the post-reset payment is out of reach. If the rent can't plausibly reach $3,521 in the example, you're borrowing time, not solving the ratio.
- It doesn't when you need maximum leverage. Interest-only usually caps at 75%, so the trade for a lower payment is a bigger down payment.
- It doesn't when your score is below 680–700. Several of the matrices above won't offer interest-only there at all.
Questions to ask before you choose interest-only
- Which payment do you use to qualify: interest-only, the recast payment, or both?
- How long is the interest-only period, and over how many months does the balance amortize afterward?
- What does interest-only cost in rate or points at my LTV?
- What are the maximum LTV and minimum score for interest-only?
- On an ARM, what are the index, margin and caps, and when is the first adjustment?
- Can I prepay principal during the IO period, and does the prepayment penalty apply to partial payments?