DSCR loans explained.
A DSCR loan qualifies a rental property mainly on the rent it produces instead of your personal income. That makes it popular with self-employed investors and people growing a portfolio.
How lenders calculate DSCR
DSCR = monthly rent ÷ PITIA
PITIA is principal, interest, property taxes, insurance and association dues. A ratio of 1.0 means the rent exactly covers the payment; 1.25 means rent is 25% higher. Lenders usually take rent from a lease or from an appraiser's market rent estimate. Check any property in our DSCR loan calculator.
Typical requirements
Every lender and program differs, and terms change with the market, but common features include:
- A minimum DSCR, frequently around 1.0 to 1.25; some programs allow lower ratios with stricter terms.
- A larger down payment than for a primary residence, often 20% to 25% or more.
- Minimum credit scores and several months of payments in cash reserves.
- Interest rates above comparable conventional loans, and prepayment penalties on many products.
- Use for investment properties only, not a home you live in.
Advantages
- No personal income verification through tax returns in many programs.
- Loans can often close in an LLC.
- No cap on the number of financed properties that conventional programs impose.
Trade-offs
- Higher rates reduce cash flow; model the actual quote, not a conventional rate.
- Prepayment penalties can make an early sale or refinance expensive.
- A property that barely meets the ratio has little room for vacancy or rising costs.
Lender DSCR vs. operating DSCR
Lender DSCR uses gross rent and ignores maintenance, management and vacancy. An operating DSCR based on NOI, like the one in our rental property calculator, is stricter. A loan can be approvable and the property still lose money each month, so check both.
See whether the rent supports the loan.
Open the DSCR calculator →General information for U.S. landlords, not legal, tax or insurance advice. Rules vary by state and city; confirm requirements with a local attorney, licensed agent or tax professional.