Financing Guide

The DSCR Lending Guide

Everything you need to know about Debt Service Coverage Ratio loans for investment properties

DSCR loans have revolutionized real estate investing by qualifying borrowers based on property cash flow rather than personal income. This guide explains how they work and when to use them.

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What is DSCR?

๐Ÿ“Š Debt Service Coverage Ratio

DSCR measures whether a property generates enough income to cover its debt obligations (mortgage payments, property taxes, insurance).

DSCR = Net Operating Income รท Annual Debt Service

Example: $30,000 NOI รท $24,000 debt service = 1.25 DSCR

< 1.0

Negative Cash Flow

Property doesn't cover debt - won't qualify

1.0 - 1.2

Borderline

May qualify with strong profile or higher down payment

โ‰ฅ 1.25

Strong Approval

Property cash flow easily covers debt

How DSCR Loans Work

Traditional Loan vs DSCR Loan

๐Ÿฆ Traditional Loan Qualification

  • โœ“ W-2 income verification
  • โœ“ Tax returns (2 years)
  • โœ“ Debt-to-income ratio
  • โœ“ Employment history
  • โœ“ Personal income sufficient for payment

๐Ÿก DSCR Loan Qualification

  • โœ“ Property's rental income
  • โœ“ Property's operating expenses
  • โœ“ DSCR calculation (typically โ‰ฅ1.20)
  • โœ— Personal income NOT required
  • โœ— Tax returns NOT required

DSCR Loan Requirements

1

Minimum DSCR Ratio

Most lenders require 1.20-1.25 minimum. Some accept 1.0 with compensating factors.

2

Down Payment

Typically 20-25%. Lower DSCR may require 25-30% down.

3

Credit Score

Minimum 620-660, though 680+ gets better rates.

4

Cash Reserves

6-12 months of PITIA (Principal, Interest, Taxes, Insurance, HOA) in reserves.

5

Property Type

1-4 unit residential investment properties (no owner-occupied).

How to Calculate DSCR

Step-by-Step Example

Step 1: Calculate Monthly Gross Rental Income

Market Rent: $3,000/month

(Use actual lease or market rent estimate)

Step 2: Apply 75% Rule

Lenders typically use 75% of rent to account for vacancies

$3,000 ร— 0.75 = $2,250/month

Annual: $27,000

Step 3: Calculate Annual Debt Service

Monthly P&I: $1,200

Property Tax: $300

Insurance: $150

HOA: $100

Total Monthly: $1,750

Annual: $21,000

Step 4: Calculate DSCR

Annual Income: $27,000

Annual Debt Service: $21,000

DSCR = 27,000 รท 21,000 = 1.29

โœ… This property qualifies (DSCR โ‰ฅ 1.25)

DSCR Loans: Pros and Cons

โœ… Advantages

  • โ€ขNo income verification: Perfect for self-employed or high-net-worth individuals
  • โ€ขUnlimited properties: No limit on number of financed properties
  • โ€ขFaster approval: Less documentation = quicker closing
  • โ€ขScale easier: Qualify based on deals, not personal income
  • โ€ขLLC eligible: Can close in business name

โš ๏ธ Drawbacks

  • โ€ขHigher rates: Typically 0.5-1.5% above conventional
  • โ€ขLarger down payment: Usually 20-25% minimum
  • โ€ขInvestment only: Cannot be used for owner-occupied properties
  • โ€ขPrepayment penalties: Some lenders charge if paid off early
  • โ€ขProperty must cash flow: Marginal deals won't qualify

Who Should Use DSCR Loans?

๐Ÿ‘จโ€๐Ÿ’ผ Self-Employed Investors

If you write off business expenses and show low taxable income, DSCR loans don't penalize you for smart tax planning.

๐Ÿ˜๏ธ Portfolio Builders

Conventional loans cap at 10 financed properties. DSCR has no limit.

๐Ÿ’ฐ High Net Worth Individuals

Privacy-focused investors who don't want to disclose income documentation.

๐Ÿš€ Fast-Scaling Investors

Buying multiple properties quickly without DTI constraints.

Calculate Your Property's DSCR

Use our DSCR calculator to see if your property qualifies for this type of financing.

DSCR Calculator โ†’

Important Disclaimer: Lender requirements vary significantly. This guide provides general information only. Contact multiple DSCR lenders directly for accurate qualification criteria, rates, and terms for your specific situation.