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?
📊 Debt Service Coverage Ratio
DSCR measures whether a property generates enough income to cover its debt obligations (mortgage payments, property taxes, insurance).
Example: $30,000 NOI ÷ $24,000 debt service = 1.25 DSCR
Negative Cash Flow
Property doesn't cover debt - won't qualify
Borderline
May qualify with strong profile or higher down payment
Strong Approval
Property cash flow easily covers debt
How DSCR Loans Work
Traditional Loan vs DSCR Loan
🏦 Traditional Loan Qualification
- ✓ W-2 income verification
- ✓ Tax returns (2 years)
- ✓ Debt-to-income ratio
- ✓ Employment history
- ✓ Personal income sufficient for payment
🏡 DSCR Loan Qualification
- ✓ Property's rental income
- ✓ Property's operating expenses
- ✓ DSCR calculation (typically ≥1.20)
- ✗ Personal income NOT required
- ✗ Tax returns NOT required
DSCR Loan Requirements
Minimum DSCR Ratio
Most lenders require 1.20-1.25 minimum. Some accept 1.0 with compensating factors.
Down Payment
Typically 20-25%. Lower DSCR may require 25-30% down.
Credit Score
Minimum 620-660, though 680+ gets better rates.
Cash Reserves
6-12 months of PITIA (Principal, Interest, Taxes, Insurance, HOA) in reserves.
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 × 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
✅ This property qualifies (DSCR ≥ 1.25)
DSCR Loans: Pros and Cons
✅ Advantages
- •No income verification: Perfect for self-employed or high-net-worth individuals
- •Unlimited properties: No limit on number of financed properties
- •Faster approval: Less documentation = quicker closing
- •Scale easier: Qualify based on deals, not personal income
- •LLC eligible: Can close in business name
⚠️ Drawbacks
- •Higher rates: Typically 0.5-1.5% above conventional
- •Larger down payment: Usually 20-25% minimum
- •Investment only: Cannot be used for owner-occupied properties
- •Prepayment penalties: Some lenders charge if paid off early
- •Property must cash flow: Marginal deals won't qualify
Who Should Use DSCR Loans?
👨💼 Self-Employed Investors
If you write off business expenses and show low taxable income, DSCR loans don't penalize you for smart tax planning.
🏘️ Portfolio Builders
Conventional loans cap at 10 financed properties. DSCR has no limit.
💰 High Net Worth Individuals
Privacy-focused investors who don't want to disclose income documentation.
🚀 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 →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.