DSCR Loans Explained: Financing Rental Properties by the Property's Income

A DSCR loan is a type of investment property mortgage that is underwritten mainly on the income the property produces, not on the borrower's personal paycheck. DSCR stands for debt service coverage ratio. It is a simple comparison between the rent a property brings in and the monthly cost of the loan. For real estate investors who own several properties, are self-employed, or have income that is hard to show on a traditional loan application, a DSCR loan can be a practical way to keep buying rentals.

How the debt service coverage ratio works

The ratio is the property's gross monthly rent divided by its monthly debt service. Debt service usually means principal, interest, property taxes, insurance, and any association dues. This is often shortened to PITIA.

For example, imagine a rental that brings in $2,400 a month, and the full monthly payment (principal, interest, taxes, insurance and dues) is $2,000. The ratio is 2,400 divided by 2,000, which equals 1.2. A ratio above 1.0 means the rent covers the payment. A ratio of 1.0 means the rent exactly covers it. A ratio below 1.0 means the rent falls short of the payment. That example is hypothetical and is only meant to show the math.

Different lenders and programs set different minimum ratios. Some require the rent to cover the payment in full. Some programs allow a lower ratio, with other requirements such as a lower loan-to-value or a larger down payment. Our DSCR program lists a ratio as low as 0.75, which means the property does not have to fully cover its own payment on paper, with terms decided case by case.

Loan-to-value and down payment

Loan-to-value, or LTV, compares the loan amount to the value of the property. A loan of $255,000 on a $300,000 property is an 85% LTV. Our DSCR program offers up to 85% LTV, which means an investor may need as little as 15% down, depending on the deal and the borrower. Higher LTV loans usually come with tighter requirements or higher rates, so it helps to compare a few structures before you decide.

What lenders typically review

Because the property is the main source of repayment, the file usually focuses on the asset. A lender will commonly look at:

• The appraised value of the property and the rent it can support, often through a rent schedule or a current lease
• The borrower's credit profile, since credit still affects the rate and the maximum loan-to-value
• Cash reserves after closing, so the borrower can cover vacancies and repairs
• The type of property, such as a single-family rental, a small multifamily building, or a condo
• Ownership structure, since many investors close in an LLC

Personal income documents such as tax returns and pay stubs are often a smaller part of the file than they would be on a conventional loan. That is the main reason self-employed investors and people with many properties look at DSCR programs.

Rates and costs to expect

Investment property loans generally cost more than a loan on a primary home, and DSCR loans are no exception. Our DSCR rates start as low as 5.55% to 6.5% for qualifying borrowers, and the actual rate depends on the credit profile, the loan-to-value, the ratio, and the property. Rates are not guaranteed, and they change with the market.

Besides the rate, ask about origination fees, appraisal costs, and whether the loan has a prepayment penalty. Some DSCR loans charge a fee if you pay off or refinance within the first few years. That matters if you plan to sell or refinance soon.

When a DSCR loan makes sense

• You are buying or refinancing a rental property that already has, or will soon have, a tenant
• Your personal income is hard to document, or you already hold many mortgages
• You want to close in an LLC instead of your own name
• You would rather have the property's rent judged than your salary

It may be a poor fit if the property is vacant and unrentable, if you plan to live in it, or if you need to renovate heavily before it can be rented. In that last case, a short-term rehab loan followed by a DSCR refinance is a common path. Our guide to fix and flip loans explains how the first step works.

Steps to get started

1. Pull together the property address, the current or expected rent, and the purchase price or estimated value
2. Gather your entity documents if you will close in an LLC, plus a photo ID and proof of funds
3. Check your credit so there are no surprises
4. Talk to us early. We help match the deal to the right program and prepare the paperwork so it holds up at closing

Rates and terms depend on the borrower, the property, and the lender, and every loan is subject to underwriting and approval. This guide is educational and is not a commitment to lend.