How DSCR Loans Work for Rental Property Investors
A DSCR loan qualifies a rental property based on whether its rent covers the monthly payment, not on your personal income. Most programs look for a ratio of about 1.0 or higher, a credit score in the 620 to 680+ range, and 20% to 25% down, though requirements vary by funder.
What is a DSCR loan?
A DSCR loan is a long-term investment property loan that uses the property rental income to qualify, instead of your W-2s or tax returns. DSCR stands for debt service coverage ratio, which measures how well the rent covers the loan payment.
That makes DSCR loans popular with self-employed investors, investors who write off a lot of expenses, and anyone growing a portfolio beyond what conventional lending allows.
How is DSCR calculated?
For a 1 to 4 unit rental, DSCR is usually the monthly rent divided by the monthly payment, including principal, interest, taxes, insurance, and any association dues (PITIA).
Example:
- Monthly market rent: $2,400
- Monthly PITIA: $2,000
- DSCR: $2,400 divided by $2,000 equals 1.20
A ratio above 1.0 means the rent more than covers the payment. A ratio below 1.0 means it does not.
What do funders typically look for?
Requirements vary, but most DSCR programs weigh the same factors:
- DSCR: commonly 1.0 or higher. Some programs allow lower ratios with more down payment or higher pricing.
- Credit score: typically 620 to 680+, with better pricing at higher scores.
- Down payment: typically 20% to 25% on purchases.
- Reserves: often 3 to 12 months of payments in liquid funds.
- Property type: non-owner-occupied 1 to 4 unit homes, condos, townhomes, and in some programs short-term rentals or small multifamily.
How is rent determined?
On a purchase, the appraiser typically completes a rent survey to estimate market rent. On a refinance, funders may use the existing lease, market rent, or the lower of the two. For short-term rentals, some funders use 12 months of booking history or third-party market data.
What are the tradeoffs?
DSCR loans usually carry somewhat higher rates than conventional investment property loans, and many include a prepayment penalty, often a step-down over 1 to 5 years. In exchange, you avoid personal income documentation and can usually close in an LLC.
When should you consider something else?
If the property needs significant renovation, a fix and flip loan may fit better, followed by a DSCR refinance once the property is leased. For buildings with five or more units, see multifamily loans.
Ready to see what a DSCR loan might look like for your property? Check your funding options or read more about DSCR loans.
This guide is for general educational purposes and is not financial, legal, or tax advice. Terms, requirements, and availability vary by funder and are subject to underwriting.