What is a DSCR Loan?
A Debt Service Coverage Ratio (DSCR) loan is a mortgage designed for real estate investors. Instead of focusing on your personal income or employment, the lender looks at the income your investment property generates. In simple terms, the property's rent covers the mortgage. If the property's monthly rental income is enough (or more than enough) to pay the monthly loan payment, you can qualify for a DSCR loan.
For example, if your rental property brings in $2,000 per month and the total monthly payment for the loan (plus taxes and insurance) is $1,500, then the DSCR is 1.33. This means the property earns 33% more than it needs to cover the debt. Lenders see this as a good sign that the property's income can comfortably pay the mortgage. DSCR loans are ideal for investors who might not show high personal income on paper (due to write-offs, self-employment, or multiple properties) because the property's cash flow is what matters.
Key Benefits of DSCR Loans
- Easier Approval for Investors: You don't need traditional income proof. Even if you're self-employed or have many write-offs on your taxes, you can still qualify as long as the property's income is strong.
- No Limit on Number of Loans: Unlike conventional mortgages that might cap the number of properties you can finance, DSCR loans let you keep adding properties to your portfolio as long as each one qualifies on its own merits.
- Flexible Loan Options: DSCR loans often come with investor-friendly terms - think 30-year amortization, fixed rates, or even interest-only periods to keep payments low in the early years.
- Close in LLC or Personal Name: Many DSCR lenders allow you to close the loan in an LLC's name if you prefer (a plus for asset protection), or you can do it in your personal name. It's up to you.
- Competitive Rates: While rates might be slightly higher than a primary residence loan, they are still competitive. The convenience of qualification and the ability to scale your investments often outweigh a marginal rate difference.
DSCR Loan Eligibility & Requirements
- Property Type: Must be an income-producing investment property. This includes single-family homes, condos, townhomes, 2-4 unit residences, and even multifamily/apartment buildings. (Primary residences and second homes typically do NOT qualify for DSCR loans.)
- Debt Service Coverage Ratio: The property's DSCR usually needs to be around 1.0 or higher (meaning the property's income at least covers 100% of the debt). Many lenders prefer a DSCR of 1.20+ to have a cushion (the property brings in 20% more income than the mortgage payment). Essentially, the more rental income relative to the payment, the better.
- Down Payment or Equity: Generally 20-25% down is required for a purchase (for example, 75-80% loan-to-value financing). If you're refinancing, you should leave about 20% equity in the property. Putting more down can potentially get you better rates or terms.
- Credit Score: A minimum credit score around 620-680 is typically needed. The exact requirement varies by lender, but higher credit scores will help you secure better interest rates and terms.
- Basic Documentation: You'll need to show the property's rental income (for an existing rental, a lease agreement; for a new purchase, an appraiser's market rent report can be used). You should also be prepared with standard documents like proof of property insurance and assets for the down payment. No personal income or job verification is required - lenders won't ask for pay stubs or tax returns for a DSCR loan.
(Note: Specific terms can vary by lender. Some may have additional requirements like a certain amount of cash reserves (e.g., 6 months of mortgage payments saved) or limits on property condition or location. Always check lender guidelines, but the above covers the basics.)
How to Apply for a DSCR Loan
- Assess Your Property's Income: Calculate your property's monthly rent and expenses. Make sure the rent (or expected rent) comfortably covers the estimated mortgage payment. This will give you an idea of your DSCR and if you meet the typical 1.0+ ratio requirement.
- Find an Experienced Lender: Look for lenders or mortgage brokers who offer DSCR loans for investors. An experienced DSCR lender will understand investor needs and guide you through the process smoothly. (They'll know the ins and outs, and can often close faster.)
- Prepare Your Documents: Even though you won't need personal income documents, gather the paperwork for the property:
- If you already own the property: copy of the current lease and rent payment history.
- If you're buying a new property: an appraisal will usually include a rent schedule or market rent analysis - be ready to discuss expected rent or provide a lease if you have one lined up.
- Recent mortgage statement (if refinancing) and proof of insurance on the property.
- Your identification and an asset statement to show you have the down payment and any required reserves.
- Apply and Get Underwritten: Submit the loan application with the lender. They will check your credit score and evaluate the property's value and income. The lender calculates the DSCR by comparing the property's monthly rent to the new mortgage payment. Because no employment or income verification is needed from you, the underwriting focuses mostly on the property's numbers and your credit/history. This often makes approval faster than a traditional loan.
- Close the Deal: Once approved, you'll go through the normal closing process (signing loan documents, etc.). DSCR loans can close relatively quickly - sometimes in 2-4 weeks since there's less paperwork to verify. After closing, you'll have the funds to purchase your investment property (or your loan will be refinanced if it's a refi). Now you can start or continue building your real estate portfolio, using the property's income to pay off the loan over time.
