A DSCR loan, short for debt-service coverage ratio, finances a rental property based on the property's income rather than yours. If the expected rent covers the mortgage payment, the loan can qualify without tax returns, pay stubs or employment verification.
How the ratio works
DSCR is the monthly rent divided by the full monthly payment (principal, interest, taxes, insurance and HOA). A ratio of 1.0 means the rent exactly covers the payment. Most lenders want 1.0 to 1.25; some allow ratios below 1.0 with a larger down payment and a higher rate. Rent is documented with a lease or the appraiser's market rent estimate.
Who uses DSCR loans
- Self-employed investors whose tax returns do not reflect their cash flow.
- Investors who already own several financed properties and have hit conventional limits.
- Buyers purchasing through an LLC, which many DSCR lenders allow.
Typical terms
- Down payment of 20% to 25%, sometimes less with strong credit and ratio.
- 30-year fixed, interest-only and adjustable options.
- Single-family homes, condos, two- to four-unit buildings, and some short-term rentals.
- Reserves of several months of payments.
- Prepayment penalties are common in the first three to five years and can often be bought down. They are disclosed on your Loan Estimate.
What to weigh
DSCR rates run higher than conventional investment loans, so if your personal income supports a conventional investment loan, that is usually cheaper. We price both. DSCR loans are for investment property only, never a home you will live in.