What Is a DSCR Loan?

A conventional loan requires proof of income, usually in the form of tax returns or pay stubs. Alternatively, DSCR loans allow buyers to qualify for a mortgage based on their rental property’s cash flow. 

Instead of using income to qualify a real estate investor for a loan, mortgage lenders will look at what is called a debt service coverage ratio or DSCR ratio. This ratio gives lenders insight into whether or not a borrower will be able to use the rental income from the property to cover their monthly loan payments. 

In addition to the DSCR ratio, investors may also have to meet certain credit score requirements or even offer a down payment, though the exact requirements vary between lenders. 

There is no limit to the number of DSCR loans you can qualify for. This means that investors who own multiple real estate properties can take out multiple loans to generate income from many tenants. This feature makes this a flexible option for beginner investors as well as seasoned real estate professionals. 

To qualify for a DSCR loan, lenders require you to have a healthy DSCR ratio. This ratio relates the income of the property to its total debt, which influences the eligibility for the DSCR loan. 

A good DSCR ratio is usually one or above, though lenders can be flexible depending on other criteria. To calculate your DSCR ratio, simply use the following DSCR formula: 

DSCR = Monthly Rental Income / PITIA (Principal, Interest, Property Taxes, Homeowners Insurance & Association Dues) 

DSCR loans are for investors in residential real estate rentals. They are a great option for anywhere from first-time investors to experienced investors with a large existing portfolio. 

Investors can use DSCR loans to purchase additional income-generating properties, which makes this an ideal loan type for those looking to tap into additional revenue streams. 

A DSCR loan is a type of Non-QM loan, or non-qualified mortgage loan. These are loan products tailor-made for borrowers who may not fit the usual criteria for a traditional mortgage. These loans tend to have different requirements when it comes to income and credit. 

In addition to providing loans for real estate investors, Non-QM loans have solutions for self-employed borrowers, gig workers, or foreign nationals. They include: 

• DSCR Loans
• Bank Statement Loans
• ITIN Loans
• 1099 Mortgage
• Foreign National Loans 
• Asset Qualifier Mortgage 
• Full Doc Loan 
• P&L Loan 
• WVOE Loan 

To qualify for a DSCR loan, lenders have specific criteria for both you and the property in question. Here are the DSCR loan requirements borrowers must meet. 

Lenders will start by confirming the borrower’s ability to repay the loan. While specific requirements vary by the lender, most borrowers can expect to meet the following criteria: 

• DSCR ratio of 1.0 and above 
• Credit scores of at least 620 (though some lenders require higher scores) 
• A down payment of 20% (though some lenders may have lower requirements) 
• A minimum loan amount of $100,000 
• A maximum loan amount of $3 million 

Again, these requirements vary between lenders, and some may be willing to work with borrowers with different credit histories depending on the property. 

In addition, lenders may also vary on the minimum and maximum loan amounts, but keep in mind that since DSCR loans are aimed at income-generating properties, you may find a narrower range than in a conventional mortgage loan. 

As for the property itself, the lender’s primary concern is that it generates enough income to cover its debt. That said, DSCR loans are reserved for investment properties that generate income, whether a single-family unit or multi-unit structure. 

In the past, lenders have restricted loans to structures of four units or less. But more recently, lenders have granted loans to larger, multi-unit properties. 

Specifically, lenders will look at the following: 

• A loan-to-value (LTV) ratio of 80% or lower 
• An appraisal report assessing the property’s value 

Additionally, lenders typically expect an LTV of 80% or lower, which means that the loan can’t be any more than 80% of the appraised value. That is why the property must be professionally appraised prior to the approval of the loan. 

While DSCR loans are a great option for real estate investors, it’s important to weigh the pros and cons whenever you take out a loan. Here are the advantages and disadvantages of DSCR loans.

To secure a DSCR loan, you’ll simply need to complete the following steps. 

Real estate investing offers the promise of great gains for the right investor. As long as you keep the property occupied with responsible tenants, you’ll have a reliable income stream that can pay off your loan and generate revenue. 

DSCR loans are ideal for investors who might otherwise lack the documentation needed for a conventional mortgage loan. 

That’s why it helps to partner with the right mortgage lender that can connect you with the best DSCR loans. The best lenders offer flexible loan terms and low interest rates while working with borrowers to find a program that aligns with their investing goals.