DSCR Loans: What They Are, How to Qualify and How to Compare

How a DSCR loan works

DSCR stands for debt service coverage ratio: the property's rent divided by its payment. A hypothetical rental bringing in $2,400 a month with a $2,000 monthly payment has a ratio of 1.2, so the rent covers the payment with $400 to spare. A ratio of 1.0 means the rent covers it exactly, and anything under 1.0 means it falls short. Lenders word the formula a little differently: one divides gross monthly rent by principal, interest, taxes, insurance and any association dues, and another divides gross rental income by the property's total monthly debt obligation. Try your own numbers in the DSCR calculator, or read how the ratio is calculated.

Who a DSCR loan fits

Real estate investors buying or refinancing a rental they won't live in. Published programs qualify on the property's rent rather than your personal income, and some let you borrow through an LLC, corporation or trust. Because each loan turns on its own property's numbers, investors can add properties one loan at a time. It isn't for a home you'll live in: the programs we read are written for rental property, and under the CFPB's commentary to Regulation Z, staying in a rental more than 14 days in the coming year makes it owner-occupied. More on who a DSCR loan fits.

What lenders look at

The property first. Published DSCR programs say they don't need your tax returns or W-2s; the file centers on the rent, the value and the payment. Requirements beyond that vary by lender:

• Minimum ratio: each lender sets its own minimum, and some programs fund below 1.0 with conditions. For the sourced figures behind that, see what minimum DSCR and other requirements lenders set.
• Down payment: the programs we read publish maximum loan-to-value limits that work out to 15% to 25% down on a purchase.
• Credit and cash: one lender says it does no hard credit pull and has no minimum liquidity requirement.
• Loan size: two published minimums are $100,000.

See what documents you'll need.

Appraisal and rent

Plan on an appraisal. It sets the property's value and, just as important, the rent that goes into the ratio. One lender requires an appraisal for both. Another sets the rent from the appraiser's market rent analysis or from automated rental valuation models. A lease helps but doesn't set the number on its own: one lender qualifies on the lower of 110% of the appraiser's market rent and your lease rent. If the property is vacant, ask how the lender will set the rent. Read more on whether a DSCR loan requires an appraisal.

Rates and costs

We don't publish rates here; what you're offered depends on the lender and the deal. Because these are business-purpose loans, Regulation Z's disclosures aren't required, so ask each lender to put every term in writing. Look past the rate to the prepayment penalty: one lender's ends after year 3, one lets you pay a higher fee or rate for a low or no penalty, and another offers no-penalty options. And remember the payment the ratio uses includes taxes, insurance and any association dues. See prepayment penalties on a DSCR loan.

Refinance and cash-out

DSCR loans work for refinancing as well as buying. Lenders with published programs list rate-and-term and cash-out refinances, and one lists delayed financing. One lender's cash-out refinance goes up to 80% loan-to-value. Seasoning, the time you've owned the property before a cash-out, varies: one lender allows it after 90 days of ownership or on a property owned free and clear, and others publish options that skip a waiting period. If you're refinancing an existing DSCR loan, check its prepayment terms first. More on refinancing a DSCR loan.

Short-term rentals

Some lenders accept them. One describes its DSCR loan as a way to buy short-term or long-term rentals and offers an automated short-term rental report; another lists short-term rentals among its eligible properties. How bookings turn into a qualifying rent is something to confirm with each lender. For reference, Fannie Mae's guide for conventional loans defines a short-term rental as a furnished property rented for brief periods, typically less than 30 consecutive days, rather than under a standard lease. Check that the property is allowed to operate as a short-term rental where it is. See short-term rental income on a DSCR loan.

Borrowing through an LLC

DSCR lenders publish their own rules for borrowing through a company. One lender lets you borrow as an individual or as a U.S. LLC with a personal guarantee. Another says loans may be vested in LLCs, corporations or trusts. Regulation Z lists credit to a borrower that isn't a person, such as a corporation or partnership, among the transactions not subject to it. Two lenders say they put no limit on the total number of financed properties you can own, and one caps how many of its own loans you can hold at five. More on how many DSCR loans you can have.

Comparing quotes

Line up the terms that change from lender to lender: how each one figures the ratio, its minimum, how it sets the rent, what credit and cash it wants, how it lets you hold title and what its prepayment penalty is. The same property can produce two different ratios at two lenders, because each counts the payment its own way. Published requirements differ on every one of those points, so compare two or three offers side by side. See how to compare DSCR loan quotes.

More DSCR answers

• What a DSCR loan is and how to qualify
• What minimum ratio lenders set
• The minimum loan amount for a DSCR loan
• Can you get a DSCR loan with no money down?
• Can I use a DSCR loan for my primary home?
• DSCR vs. a conventional investment property loan
• DSCR loan questions, answered

Frequently asked questions

What is a DSCR loan?

A DSCR loan is a business-purpose mortgage for a rental property you don't live in. It qualifies on whether the property's rent covers its payment, not on your personal income.

Is DSCR based on my income or the property's income?

The property's. Lenders with published programs say they qualify on the property's rental cash flow instead of your personal income, with no tax returns or W-2s to document.

Do I need a tenant or lease in place?

A lease helps, but it doesn't set the rent on its own. One lender qualifies on the lower of 110% of the appraiser's market rent and your valid lease rent. If the property is vacant, ask whether the lender will use the appraiser's market rent.

Does a DSCR loan require an appraisal?

Plan on one. One lender requires an appraisal to verify both the value and the rent, and another sets the rent from the appraiser's market rent analysis or from automated rental valuation models.

Can I use a DSCR loan for a primary home?

No. The DSCR programs we read are written for rental property you don't live in. For a home you'll live in, look at the loans built for that.

Is there a prepayment penalty?

There can be, and at the lenders we read you can shape it. One lender's penalty ends after year 3, one lets you pay a higher fee or rate for a low or no penalty, and another offers no-penalty options.

Can I qualify if the property doesn't cash flow?

At some lenders: each lender sets its own minimum and some programs fund below 1.0 with conditions.

Can I get a DSCR loan with no money down?

Not from the programs we read. Their published limits mean a down payment of 15% to 25% on a purchase, depending on the program and your credit score.