Can You Get a DSCR Loan with a DSCR Below 1.0?

Are you wondering if you can get a DSCR loan with a DSCR below 1.0? 

Most lenders require higher ratios but don’t worry, you can get approved with a sub-1.0 DSCR through Truss Financial Group. 

Truss Financial Group specializes in these scenarios, focusing on the property's ability to generate income even when it does not cover the debt payments. 

In this guide we’ll break down the realities of low DSCR lending, qualification requirements and practical steps to strengthen your application.

Key Takeaways:

Low DSCR Loans: You can get a DSCR loan with a ratio below 1.0, even 0.75 through specialized brokers like Truss Financial Group.

Risks & Benefits: Low DSCR loans have higher interest rates and stricter terms, but you can get high-potential properties and grow your portfolio.

Improve DSCR: Increase rental income, reduce expenses, and manage debt better to improve your DSCR and get better loan terms.

Compensating Factors: Strong borrower financials, property improvements and market potential can mitigate the risks of low DSCR.

What  is  Debt  Service  Coverage  Ratio  (DSCR)?

The debt service coverage ratio (DSCR) measures how well a property’s income covers its loan payments. This metric helps lenders assess the risk of providing investment property loans.

(For a detailed breakdown of DSCR loans and their requirements, check out our DSCR loan guide.)

How To Calculate DSCR?

DSCR is simple to calculate but requires accurate income and expense figures. Here’s the basic formula:

For investment properties, this breaks down to:

• NOI = Annual Rental Income - Operating Expenses
• Annual Debt Service = 12 months of principal and interest payments

For example: If your property generates $24,000 in annual rental income with $4,800 in operating expenses, your NOI would be $19,200. With annual debt payments of $20,000, your DSCR would be 0.96. Ensuring that rental income can adequately support monthly mortgage payments is very important for maintaining a healthy DSCR.

(For a detailed breakdown of calculating NOI and understanding all its components, see our NOI guide.)

Unlike hard money loans that focus primarily on the property’s value (see our DSCR vs. Hard Money Loans comparison), DSCR loans offer more flexibility for real estate investors.

Why DSCR is important in real estate investing?

DSCR is important in real estate investing because it shows whether your property’s net operating income can generate enough income to cover its debt payments.

Here’s why:

• Risk Assessment: DSCR helps you assess investment risks before they become problems. Unlike traditional loans that look at your personal income, DSCR looks at the property’s actual performance - giving you a clearer picture of your investment’s health.
• Portfolio Management: Strong DSCR numbers make expanding your real estate portfolio easier. When each property has a healthy cash flow you’re better positioned to take on more investments. This ratio helps you identify which properties are performing well and which need attention.
• Financial Planning: DSCR forces you to look at the property’s real numbers: 
  
• Lender Relationships: A solid DSCR typically leads to better loan terms, more competitive rates and easier approval process.

Most brokers prefer to see DSCR above 1.0, but at Truss Financial Group we understand that sometimes good investments temporarily show lower ratios. We’ve developed programs specifically for these situations, when your DSCR is below 1.0.

If your DSCR is below 1.0 and would like to get a loan contact us here.

Lender Considerations of DSCR Ratio in Real Estate Lending

1. Risk Assessment

• DSCR above 1.0: Preferred, as it shows the property generates enough income to cover debt payments.
• DSCR below 1.0: Higher risk, but Truss Financial Group may still get your loan approved based on compensating factors.

2. Loan Terms

• Higher DSCR = Better terms (lower rates, longer repayment).
• Lower DSCR = Stricter terms (higher rates, reduced loan amount).

3. Property & Market

• Multifamily properties in high-demand areas are favored, even with lower DSCRs.
• Market trends, tenant stability and growth potential are also considered.

4. Compensating Factors

• Strong borrower financials (credit score, cash reserves, investment history).
• Potential for property improvements or increased rental income.
• Growing markets with rising demand.
  

5. Loan-to-Value (LTV) Ratio

A lower LTV (more equity) can offset a lower DSCR.

6. Future Income

Lenders may consider future income growth from renovations, rent increases or market trends.

A DSCR below 1.0 doesn’t disqualify you. Truss Financial Group considers factors beyond the ratio, offering tailored solutions for investors with lower DSCRs.

Minimum DSCR Requirements by Property Type

Different property types have different DSCR requirements, as lenders assess risk based on the property’s income potential and market stability. 

Here’s a breakdown of typical DSCR thresholds by property type:

1. Multifamily Properties

• Minimum DSCR: 1.20–1.25
  Multifamily properties (apartments, duplexes, etc.) are generally favored by lenders as they have stable rental income and lower vacancy risk. A DSCR of 1.20 or higher is often required as these properties are considered less risky.

2. Single-Family Rentals

• Minimum DSCR: 1.10–1.15
  Single-family rentals (SFRs) are slightly riskier than multifamily properties due to higher vacancy rates and single tenant risk. Lenders typically look for a DSCR of at least 1.10 to ensure the property can cover its debt payments.

3. Commercial Properties

• Minimum DSCR: 1.25–1.30
  Commercial properties (office buildings, retail spaces) require a higher DSCR due to longer lease terms and potential income fluctuations. Lenders usually seek a DSCR of 1.25 or more to account for these risks.

4. Mixed-Use Properties

• Minimum DSCR: 1.20–1.25
  Mixed-use properties (residential and commercial spaces) are evaluated based on income from both sectors. Lenders typically require a DSCR of 1.20 or higher depending on the property’s tenant mix and market demand.

5. Vacation Rentals

• Minimum DSCR: 1.15–1.20
  Vacation rentals are at higher risk due to seasonal income fluctuations. Lenders often require a DSCR of 1.15 or more to ensure the property can generate enough income during peak seasons.

6. Industrial Properties

• Minimum DSCR: 1.25–1.30
  Industrial properties (warehouses, manufacturing facilities) are generally stable but may have longer lease terms. Lenders typically look for a DSCR of 1.25 or higher to account for potential income variability.

Can You Get a DSCR Loan with a DSCR Below 1.0?

Yes, it is possible to get a DSCR loan even if your Debt Service Coverage Ratio (DSCR) is below 1.0. 

Most traditional brokers prefer a DSCR of 1.0 or higher (meaning the property’s income covers its debt payments), but Truss Financial Group offers solutions for investors with lower ratios (below 1). Here’s how it works and what we consider:

How It’s Possible

• We’re Specialized: Traditional banks and conventional brokers typically require a DSCR of 1.0 or higher. However, at Truss Financial Group we are more flexible and have a lot of experience in working with difficult loans. We may have your loans approved with DSCRs as low as 0.75 especially for purchase transactions or properties with high potential for income growth.
• Compensating Factors: Lenders may approve a loan with a low DSCR if other factors offset the risk. These can include: 
  1. Strong Borrower Financials: A good credit score, significant cash reserves or a history of successful real estate investments.
  2. Property Improvements: If the property has potential for renovations or upgrades that could increase rental income, lenders may be more willing to approve the loan.
  3. Market Potential: Properties in growing markets with increasing rental demand may qualify even with a lower DSCR.

Risks of a Low DSCR Loan

It’s possible to get a loan with a DSCR below 1.0, but there are risks to consider:

• Higher Interest Rates: Loans with lower DSCRs often come with higher interest rates to compensate for the increased risk.
• Stricter Terms: Lenders may impose stricter terms, such as shorter repayment periods or higher down payment requirements.
• Cash Flow Challenges: A DSCR below 1.0 means the property’s income doesn’t fully cover its debt payments which could lead to cash flow issues if rental income decreases or expenses rise.

Benefits of a Low DSCR Loan

A DSCR loan with a ratio below 1.0 comes with risks but there are also several benefits for real estate investors:

• Financing for High-Potential Properties: Low DSCR loans allow you to buy properties that may currently have lower income but strong potential for future growth. 
• Portfolio Expansion: A low DSCR loan allows you to buy more properties even if the current income doesn’t cover the debt payments giving you the opportunity to scale faster.
• Short-Term Cash Flow Challenges: If you’re confident you can improve the property’s income. A low DSCR loan can help you bridge the gap during the initial period when cash flow may be tight.
• Focus on Property Potential: This can be especially useful for investors who may have strong property management skills but limited personal income or credit history.
• Competitive Advantage: Being able to get a loan with a low DSCR can give you an edge over other buyers who may be limited by stricter lending requirements. 
• Tax Benefits: A low DSCR loan may be tax-deductible, this can help offset some of the costs associated with higher interest rates or stricter terms.

When a Low DSCR Loan Makes Sense

• Short-Term Strategy: If you plan to improve the property and increase its income potential a low DSCR loan can be a short-term solution.
• High Equity Properties: If the property has a lot of equity lenders may approve a loan with a lower DSCR.
• Experienced Investors: Investors with a proven track record in real estate may find it easier to get low DSCR loans as lenders trust their ability to manage and improve the property.

Most brokers prefer a DSCR of 1.0 or higher, Truss Financial Group offers options for investors with lower ratios. If you’re considering a low DSCR loan make sure you weigh the risks and have a plan to improve the property’s income or manage cash flow challenges.

Contact us here to get started today!

Required Documentation for DSCR Loans

To apply for a DSCR loan, you’ll need to provide various documents to the lender. These may include:

• Business Plan: Outlines your investment strategy and how you plan to generate rental income.
• Financial Statements: Includes balance sheet, income statement, and cash flow statement to provide a comprehensive view of your financial health.
• Property Appraisal: An independent assessment of the property’s value.
• Tax Returns: Typically required for the past two years to verify your financial history.
• Bank Statements: To show your cash reserves and financial stability.
• Rent Rolls and Lease Agreements: For rental properties, these documents provide details on current tenants and rental income.

Make sure your documents are well-organized and presented clearly to improve your chances of getting a favorable loan offer. Proper documentation demonstrates your preparedness and professionalism, which can positively influence the lender’s decision.

How to Improve Your DSCR

Improving your Debt Service Coverage Ratio (DSCR) can make it easier to get approved and get better loan terms. 

Here are some practical steps to boost your DSCR:

1. Increase Rental Income

• Raise Rents: If the market allows increased rent.
• Reduce Vacancies: Minimize vacancy periods by offering incentives for lease renewals or improving tenant retention.
• Add Revenue Streams: Add amenities or services (e.g. parking fees, laundry facilities) to generate additional income.

2. Reduce Operating Expenses

• Negotiate with Vendors: Lower costs for maintenance, utilities and property management by negotiating better rates with service providers.
• Cut Unnecessary Costs: Review expenses and eliminate non-essential spending.
• Improve Energy Efficiency: Invest in energy-efficient upgrades to reduce utility bills over time.

3. Refinance Existing Debt

• Lower Interest Rates: Refinance your mortgage at a lower interest rate to reduce your monthly debt payments.
• Extend Loan Terms: Extend the repayment period to lower your monthly debt obligations.

4. Pay Down Debt

• Reduce Principal: Paying down existing debt reduces your monthly debt service.
• Avoid New Debt: Avoid taking on additional debt that increases your monthly obligations.

5. Improve Property Management

• Efficient Management: Streamline property management to reduce costs and maximize income. Hire a professional property manager if it leads to better financial performance.
• Regular Maintenance: Prevent costly repairs by maintaining the property regularly which can also help retain tenants.

What Affects DSCR?

Several things can impact your DSCR and knowing what they are can help you take action to improve:

• Rental Income: The rent you can charge is based on local market conditions. Higher rent improves your DSCR. Low vacancy rates increase your income and DSCR.
• Operating Expenses: High maintenance or repair costs eat into your net operating income (NOI) and lower your DSCR. Fixed expenses like taxes and insurance can impact your DSCR if they increase unexpectedly.
• Debt Obligations: Higher interest rates increase your monthly debt payments and lower your DSCR. Shorter loan terms can also negatively impact your DSCR.
• Market Conditions: Economic downturns reduce rental demand and income while growth periods increase it. 
• Property Type: Multifamily properties have more stable income streams and higher DSCR compared to single-family rentals. Commercial properties have longer lease terms but also higher vacancy risks which affect DSCR.

Improving your DSCR means increasing rental income, reducing expenses and managing debt. Knowing what impacts your DSCR can help you take action to strengthen your financial position and get better loan terms.

Apply for a DSCR Loan with Low DSCR

As an experienced DSCR mortgage broker Truss Financial Group has experience working with real estate investors with a DSCR below 1.0. 

Our streamlined application process ensures a smooth experience with a team of experienced loan officers guiding you every step of the way.

Whether you’re purchasing a long-term rental property or venturing into short-term vacation rentals we understand the challenges of low DSCR scenarios and offer flexible options to fit your needs. 

We focus on property potential and borrower expertise to get you the financing you need to grow your investment portfolio. Learn how Truss Financial Group can help you navigate the DSCR loan process and achieve your real estate goals.

Frequently Asked Questions

Can I get a DSCR Loan with a DSCR below 1.0?

Yes, it’s possible to get a DSCR loan with a ratio below 1.0. While traditional lenders require a DSCR of 1.0 or higher, Truss Financial Group may be able to get your loans approved with DSCRs as low as 0.75 for purchase transactions. We focus on the property’s potential and the borrower’s overall financial health, not just the current income-to-debt ratio. 

What are the risks of getting a DSCR loan with a low DSCR?

Low DSCR loans come with higher risks including higher interest rates, stricter loan terms and potential cash flow challenges if the property’s income doesn’t cover debt payments. However these risks can be managed with a solid plan to improve the property’s income or manage short-term financial gaps.

How can I improve my DSCR to get better loan terms?

To improve your DSCR focus on increasing rental income (e.g. raise rents, reduce vacancies) and reduce operating expenses (e.g. negotiate vendor costs, improve energy efficiency). Refinance existing debt at lower rates or extend loan terms to lower monthly payments and improve your DSCR.

What are the compensating factors that will get me a DSCR loan with a low DSCR?

Truss Financial Group can help you qualify for a DSCR loan even with a DSCR of less than one, provided you have strong compensating factors such as a good credit score, significant cash reserves or a history of successful real estate investments. Properties with high potential for income growth (e.g. through renovations or market appreciation) are more likely to qualify.