What is a DSCR loan?

A DSCR loan is an investment-property financing option that primarily evaluates the property's rental income rather than your personal employment income. Approval also depends on credit history, down payment, reserves, property eligibility and lender guidelines. DSCR stands for debt service coverage ratio. The idea is simple: does the property earn enough to pay for itself?

DSCR in one sentence

DSCR is the property's monthly rent divided by its monthly housing payment. A ratio of 1.00 means the rent exactly covers the payment. Above 1.00 means there is room to spare.

How lenders calculate it

For rentals with 1 to 4 units, lenders commonly divide the qualifying monthly rent (from the lease or an appraiser's market-rent estimate) by the full monthly payment of principal, interest, property taxes, insurance and any HOA dues. Commercial property loans generally use net operating income divided by annual debt service instead. Methods vary by lender and loan program. Ask your lender which one they use.

Example, not a quote: a rental with $2,800 in monthly rent and a $2,460 payment has a DSCR of about 1.14 ($2,800 ÷ $2,460).

Many lenders look for a ratio of about 1.20 to 1.25 or higher to offer their best terms. Some accept lower ratios, down to about 1.00, usually with a larger down payment or different pricing.

Who uses DSCR loans

• Self-employed investors whose tax returns do not show their full cash flow.
• Investors who own several properties and are close to the limits of conventional lending.
• Buyers who want to close in an LLC, which many DSCR lenders allow.

What to expect

• Down payments often start around 20% to 25%.
• Credit score minimums are commonly in the mid-600s or higher.
• Lenders usually want reserves, often several months of the payment in savings.
• Rates and fees are often higher than for a home you live in, and many DSCR loans carry a prepayment penalty. Ask for the schedule before you sign.
• In Florida, insurance for wind and flood can change the payment a lot, so get quotes before you make an offer.

Try it

Use the rental DSCR calculator to see how rent, price and down payment change the ratio. For commercial properties, use the commercial DSCR calculator. When you have a property in mind, a loan officer can walk through the options with you. Our free DSCR guide has more detail and a checklist of documents.