Debt Service Coverage Ratio (DSCR) Loan

Key Takeaways

• The Debt Service Coverage Ratio (DSCR) is a number that measures a property’s current rental income against its debt obligations. A DSCR value of more than 1.0 indicates positive cash flow, whereas less than 1.0 indicates negative cash flow.
• DSCR loans are based entirely on rental income. This means tax returns, W-2s, or employment details are not required.
• These are only investment property loans. They cannot be used to finance a primary residence, vacation home, or fix-and-flip property.
• Lenders require at least a DSCR of 1.25. Some lenders accept 1.0 but with more stringent terms, such as higher interest rates or larger down payments.
• Typically, a 20-25% down payment and a credit score of 620+ is required. A higher loan sum may require a higher DSCR, more cash reserves, or additional underwriting.
• DSCR loans are flexible and allow investors to finance multiple properties. However, they often come with higher interest rates, larger down payments, and possible prepayment penalties.

What is a Debt Service Coverage Ratio (DSCR) Loan?

A DSCR measures whether or not a rental property’s income is sufficient to cover its debt obligations.

Lenders use DSCR to determine whether an investment property generates enough cash flow to cover mortgage payments, property taxes, and insurance.

Unlike traditional mortgages, which rely on an applicant’s personal income and employment history, DSCR loans are approved based on the financial strength of the property itself.

If the property earns more than enough rental income to cover the mortgage, it has a high DSCR, which also reduces the risk for lenders. On the other hand, if the rental income is barely enough or insufficient, lenders may consider the property too risky.

How to Calculate DSCR

DSCR is calculated using the following formula:

Where:

• Net Operating Income (NOI): The property’s total rental income minus the operating expenses like maintenance and management fees.

• Annual Debt Service (ADS): The full annual mortgage payment, including principal, interest, property taxes, and insurance.

Calculate your DSCR

Example of Debt Service Coverage Ratio Calculation

For example, if your NOI is $120,000 and your annual debt service is $100,000, the DSCR would be:

A DSCR of 1.2 means that for every dollar of debt, there is $1.20 in income, which indicates that cash flow is sufficient.

What Different DSCR Values Mean

DSCR = 1.0

A DSCR of 1.0 indicates that the borrower’s income is just enough to cover the debt obligations. This further proves to the lender a break-even but also leaves no margin for any unexpected expenses.

DSCR > 1.0

A DSCR of greater than 1.0 indicates a positive cash flow. It suggests to the lender that the borrower is capable of meeting the debt payments. Lenders usually prefer borrowers with high ratios for added security.

DSCR < 1.0

A DSCR below 1.0 indicates that the property’s net operating income (NOI) is not sufficient to cover the total debt service (TDS). This shows that the rental income falls short of the mortgage payment.

In general, the higher the DSCR value, the lower the risk for lenders. This will translate to better loan terms and lower interest rates.

How to Improve DSCR for Loan Approval

If your DSCR is lower than 1.25, there’s a slim chance your loan will be approved. While some lenders may approve a DSCR <1.0, they require additional collateral and charge higher interest rates.

Here’s how you can improve your DSCR:

• Increase Rental Income: Based on market trends, check if you can raise rents or improve property features to attract higher-paying tenants.
• Reduce Operating Expenses: Lower maintenance costs, property management fees, or insurance premiums.
• Make a Larger Down Payment: A bigger down payment reduces the loan amount, lowering the mortgage payment and increasing DSCR.
• Refinance to a Lower Interest Rate: Lower interest rates reduce the monthly debt service, improving DSCR.
• Choose an Interest-Only Loan: Some DSCR loans offer interest-only payments, which lower the monthly mortgage payment, improving DSCR.

Apply Now

How DSCR Loans Work

In DSCR loans, real estate investors can rent properties and secure funding with rental income instead of their personal income.

Here’s how they work:

• Rental Income Approval: Lenders look into the income generated to determine if it suffices for the loan payment.
• No Employment Records Needed: Forget the tax forms, employment documents, and even salary stubs.
• Calculating DSCR: Your rental income is divided by your debt. While a DSCR of 1.0 is a common threshold, most lenders prefer a DSCR of 1.25 and higher.
• Multiple Loans Allowed: Investors can use several DSCR Loans and secure various properties.
• Down Payment & Credit Score Requirements: A 20% to 25% deposit and a credit score of at least 620 are primarily required.
• Flexible Rental Strategies: Enables long-term rentals, Airbnb, and other rental investment required structures.

This type of loan suits investors keen on purchasing more properties without worrying about a stable income.

DSCR Loan Requirements

Before you can qualify for a DSCR loan, you need to meet lender requirements.

Here’s what you can expect:

1. Minimum Credit Score: 620 or Higher

The minimum credit score is 620. However, lenders can have stricter requirements depending on the type of property and loan. A higher credit score, such as 700+, can help you secure better loan terms and lower interest rates. While income is not a factor, a good credit score shows you’re financially responsible.

2. Minimum Loan Amount: $100,000

DSCR loans typically start at $100,000, with most lenders offering a maximum of $2 million to $5 million (starts with $75,000+ in some cases as well). For higher loans, you’ll need to have a higher DSCR, additional cash reserves, and comply with stricter underwritings.

3. Property Appraisal

An appraisal helps determine a property’s market value and rental income potential. For long-term rentals, your lender will rely on current lease agreements or even a market rent analysis. For short-term rentals, on the other hand, have your Airbnb/VRBO income history at hand.

4. Property Eligibility: Investment Properties Only

DSCR loans can only be used for investment properties. The property must be non-owner-occupied and generate rental income. Primary residences, second homes, fix-and-flip properties, and vacant land don't qualify.

5. DSCR Ratio Requirement: 1.0 – 1.25 Minimum

Most lenders require a minimum DSCR of 1.25, though some accept 1.0 with stricter terms. A higher DSCR (1.5 or more) may qualify you for lower interest rates and better loan terms.

6. Cash Reserve Requirements: 6-12 Months of Mortgage Payments

Lenders typically require 6-12 months of mortgage payments in reserves to cover unexpected expenses or vacancies. Reserves can come from savings, investment accounts, or retirement funds.

Benefits of DSCR Loans

Since securing financing can be a challenge for investors, especially if they’re self-employed or their taxable income appears low due to deductions, DSCR mortgages offer significant advantages. They allow you to qualify for a loan based solely on a property’s rental income, offer flexibility and have faster approvals.

Click here if you're interested in detailed breakdown of pros and cons of DSCR Loans. 

Here’s a closer look at the benefits of DSCR loans.

1. Personal Income Verification Isn’t Required

Your eligibility for a DSCR loan depends solely on the property’s cash flow. This means no W-2s, tax returns, or pay stubs. DSCR loans allow investors to obtain financing without being penalized for reducing taxable income.

2. Less Paper Work with a Faster Approval Process

DSCR mortgages involve much less paperwork than traditional mortgages. This means that the approval and closing process is much faster, and investors can quickly secure properties, which is an important advantage in competitive real estate markets.

Here’s a side-by-side comparison of typical loan processing times:

3. You Can Finance an Unlimited Number of Properties

Traditional lenders usually limit an investor's number of mortgages to 10 financed properties. DSCR loans, on the other hand, don't have this restriction.

This allows investors to finance an unlimited number of rental properties, which is a great advantage if you're looking to scale your portfolios. Personal income caps will not restrict investors, and they can keep buying properties as long as each one meets the DSCR requirements.

4. Works for Short-Term Rentals & Airbnb Properties

Most traditional lenders are unwilling to finance short-term rental properties, such as Airbnb and VRBO, since their income fluctuates depending on the occupancy rate and seasonal demand. DSCR loans, however, are available for both long-term and short-term rental properties.

5. Interest-Only Payment Options for Better Cash Flow

Many DSCR lenders offer interest-only loan options, which allow investors to maximize cash flow by lowering their monthly payments. Instead of paying both principal and interest, you only have to pay interest for a set period (typically 5-10 years).

6. No Debt-to-Income (DTI) Restrictions

Traditional lenders determine your Debt-to-Income (DTI) ratio to determine whether or not they can afford a loan. If an investor already has several mortgages, their DTI may exceed lender limits and make further financing impossible.

DSCR loans do not use DTI in any way. Lenders will only review the rental income; therefore, an investor can have multiple loans without personal debt interfering with the approval.

Apply Now

Drawbacks of DSCR Loans

While DSCR loans offer significant benefits, investors must also consider their drawbacks. In general, they involve higher interest rates, larger down payments, and higher lending standards than traditional loans.

1. Interest Rates Higher than Traditional Loans

Perhaps one of the main drawbacks of DSCR mortgages is that they offer higher interest rates than traditional home mortgages. Since lenders are risking more by not verifying your personal income, they charge higher interest rates to offset the risk.

These are the typical interest rates for DSCR loans as compared to conventional mortgages:

Why Do DSCR Loan Interest Rates Have To Be Higher?

• A no-income-verification loan inherently poses more risk for lenders.
• As a non-QM (non-qualified mortgage), DSCR loans do not qualify under traditional standards for lending.
• Many DSCR loans are funded by private lenders or portfolio lenders rather than Fannie Mae/Freddie Mac.

2. Higher Down Payment Requirements

DSCR loans generally require a higher down payment than other conventional mortgages. While a traditional loan may permit as little as 3-5% down, DSCR loans typically require 20-25% down.

Standard down payment requirements include:

This increased down payment is required because:

• Lenders want to reduce risk by ensuring borrowers have a vested interest.
• A higher down payment brings down the LTV, which poses a risk for lenders.

Here’s How You Can Reduce the Down Payment

• Improve credit score: Some lenders offer 80% LTV loans (20% down) to borrowers with 700+ credit scores.
• Target properties with strong DSCR ratios: If the property's cash flow is exceptional, lenders may be more lenient.
• Consider a portfolio loan: Some portfolio lenders offer DSCR loans with smaller down payments if they are financing multiple properties.

3. Strict DSCR Requirements for Certain Properties

While many lenders accept a DSCR as low as 1.0, others, depending on the property type, require higher ratios (1.25-1.5).

The minimum DSCR requirements based on property type are:

Why are DSCR Requirements Stricter for Airbnb & Short-Term Rentals?

• Income is less predictable than long-term leases.
• Seasonal vacancies for short-term rentals
• Lenders require a safety margin in case bookings decline.

4. Prepayment Penalties May Apply

Many DSCR mortgages include prepayment penalties, which means you must pay extra fees if they refinance or pay off the loan early. These penalties typically apply within the first 3-5 years of the loan term.

How to Avoid Prepayment Penalties:

• Look for lenders who offer DSCR loans without penalty for prepaying.
• Negotiate the terms of a penalty before signing the loan.
• Consider a loan that has a short penalty period, such as 1 year rather than 3 to 5 years.

How to Avoid DSCR Loan Surprises

When you’re preparing to apply for a DSCR loan, it’s important to keep tabs on some surprises that can arise. Here’s what you need to keep in mind:

Prepayment Penalties

You will be charged prepayment penalties if you pay off your loans early, either through selling or refinancing. These charges vary by lender, so knowing your loan terms beforehand will help you plan ahead.

Common penalty structures include:

• 3-2-1 Step-Down This is the most common type of prepayment penalty structure. If you pay off the loan in year one, the penalty is 3% of the remaining balance, dropping to 2% in year two and 1% in year three. After that, you’re in the clear.
• 5-4-3-2-1 Step-Down This structure is similar to the 3-2-1 but with a longer penalty period, starting at 5% in year one and decreasing each year until year five.
• 6 Months of Interest Some lenders charge a prepayment penalty equal to 6 months’ worth of interest if you pay off the loan before the agreed prepayment period ends.

Hidden Fees

Lenders will not always disclose every cost upfront, which is why it’s crucial to review your loan agreement carefully.

Make sure to keep an eye out for fees like:

• Loan origination fees
• Underwriting fees
• Administrative fees

These hidden fees may appear on a term sheet or a loan estimate. Many lenders prefer term sheets, which can sometimes make it harder to spot all the hidden costs.

Appraisal Issues

As a part of the loan process, lenders will require an appraisal to assess the property’s value. If the appraisal comes out to be lower than expected, this could affect your eligibility for a loan. However, a lower appraisal doesn’t always mean a complete fallout. It just means preparing for a larger down payment.

Market Conditions

Interest rates and lending criteria shift based on economic conditions, so it's important to be prepared for potential changes that could impact your loan terms. Monitoring market trends will help you make informed decisions and lock in the best possible deal.

Alternatives to DSCR Loans

DSCR loans are a great option for real estate investors, but they’re not the only way to secure financing. If a DSCR loan isn’t the right fit for you, or if you don’t qualify, there are other options.

These include:

1. Private Money Loans

Also known as hard money loans, these provide quick access to capital with shorter loan terms. They’re great for situations that require fast funding, like bridge loans, construction projects, or rescue purchases.

2. Bank Statement Loans

Instead of relying on W-2s or pay stubs, these loans use your bank statements to determine eligibility, making them a good option for self-employed investors.

3. Asset-Based Loans

Rather than using your income to qualify, these loans consider your assets, such as bank accounts, investments, and retirement funds. This allows you to secure financing without putting those assets up as collateral.

Working with DSCR Lenders

Working with the right lenders is just as important as securing finances. The right lender can simplify the process and help structure your loan in a way that aligns with your investment goals.

Questions to Ask Your DSCR Mortgage Lender

Before you commit to a DSCR loan, make sure you understand all the terms, requirements and costs.

Here are some key questions to ask when evaluating a DSCR lender.

What are the interest rates, loan terms, and fees?

Find out whether the interest rate is fixed or adjustable and how it affects your long-term costs. Also, ask about loan duration, repayment structure, prepayment penalties, and any potential balloon payments.

What fees should I expect?

Loan origination fees, discount points, closing costs, and administrative charges can add up. To avoid surprises, you should request a complete breakdown at closing.

What types of properties qualify?

DSCR loan eligibility varies by lender, so confirm whether they finance the type of property you’re investing in. This includes residential, multi-family, commercial, or rural properties.

How much experience do you have with DSCR loans and real estate investors?

Working with a lender who specializes in DSCR loans ensures they understand the unique needs of investors. They should be well-versed in property cash flow analysis, DSCR calculations, and structuring loans that maximize investment potential.

What funding sources do you work with?

A strong DSCR lender should have multiple funding sources rather than rely on a single one. These sources include private equity, securitization, and large insurance companies.

Apply Now

DSCR Loan Process

1. Identify an Eligible Investment Property

Before you can get a DSCR, it’s important to find out whether you’re eligible for a loan in the first place. DSCR loans are designed for investment properties and not primary residences. Therefore, to qualify for a DSCR loan, you must either be refinancing or purchasing a rental property that generates an income.

Types of properties eligible for DSCR loans:

• Single-family rental homes
• Multi-family properties
• Short-term rentals
• And more

We’ll get into these in more depth later.

Step 2: Calculating the Property’s DSCR

Since lenders approve DSCR loans based on the property’s income, the next step is to calculate the DSCR ratio. This determines whether the rental income is sufficient to cover the mortgage payment.

Step 3: Loan Application & Underwriting Process

Once you calculate the DSCR and meet lender requirements, you can start the loan application process. Unlike traditional mortgages, which require W-2s, tax returns, and pay stubs, DSCR loans are relatively straightforward since they focus only on the property's financials.

Here's what lenders review when approving a DSCR loan application:

• Property's rental income
• DSCR ratio
• Credit score
• Down payment & reserves
• Property Appraisal

You'll need the following documents to process your DSCR loan application:

• Loan application form: This is your loan application, which includes the essential details about you and the property. It's very easy to write, typically up to five pages long, and takes 15 minutes to complete.
• Bank statements for down payment and reserves
• Credit authorization: It's an authorization form for the lender that allows them to run a credit report and background report on you.
• Lease agreement for property (if renting): If your property is occupied and rented for a long time, the lease documents are required.
• Short-term rental history: This only applies if you use your property as a short-term rental, like Airbnb. A 12-month history must be available.
• Insurance: You must provide property insurance. If the property is federally considered a ‘flood zone,’ then flood insurance is also required.
• Entity Documents: If you are borrowing as an individual, this is not applicable to you. However, if investors choose to set up an LLC, some documents are required, such as Certificates of Good Standing, Certificates of Formation, Articles of Organisation and Operating Agreements.
• Renovation documents: For cash-out refinances or BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method loans, some lenders require work orders, invoices, or receipts, especially for loans based on After-Repair Value (ARV). Others may accept before-and-after appraisals or contractor invoices instead.

Since there's no income documentation required, the approval process is faster than traditional mortgage applications. A DSCR mortgage closes within 2-4 weeks, whereas a traditional mortgage can take 45-60 days.

Step 4: Loan Approval & Funding

If your DSCR mortgage application is approved, you will receive a loan offer that includes the following:

• Loan amount, which is based on the LTV ratio and DSCR calculation.
• Interest rate that’s typically 0.50-1.50% higher than conventional mortgages.
• Loan term that’s 30 years fixed, though interest-only options are available.

Once you accept the loan terms, the lender funds the mortgage, and the property officially becomes the investor’s.

Apply for a DSCR Loan Now

Types of Properties Eligible for DSCR Loans

DSCR loans offer funding opportunities for various investment properties, making them a flexible real estate option.

However, it's important to note that not every property qualifies. DSCR loans are intended for income-generating rental properties and cannot be used for primary residences.

1. Single-Family Rental Properties

Single-family rental properties are among the most common investment types financed by DSCR loans. These are free-standing houses leased to tenants under long-term rental agreements.

Single-family properties are relatively easier to qualify for because they are stable and have predictable rental income. Most lenders will even accept lower DSCR requirements for such properties.

2. Multi-Family Properties (Duplex, Triplex, Fourplex)

Multi-family properties, including a minimum of two to four units, are allowed in DSCR loans. This type of property is attractive to investors since they have the potential to yield several income sources at the same time, minimizing the effect of vacancies.

Due to this, lenders may make an exception and tolerate a slightly lower DSCR ratio for multi-family units.

3. Condos and Townhouses

Condos and townhouses can also be eligible for DSCR loans if they are non-owner-occupied and used as investment properties.

However, lenders may have additional restrictions based on the homeowners' association (HOA) rules, property location, and rental demand in the area. For example, some lenders may require a certain percentage of condominium complex units to be owner-occupied.

4. Short-Term Rental Properties (Airbnb, VRBO, Vacation Rentals)

DSCR loans can also be used for short-term rental properties, even if the property is listed on Airbnb, VRBO, or other types of vacation rental platforms. These properties usually have higher rental income than a traditional long-term rental, but the vacancy risks and income fluctuation risks are higher as well.

Some lenders demand higher DSCR ratios (1.5 or more) for short-term rental properties. This ensures they generate enough income even during seasonally slow periods. Lenders may also request past rental income data to verify income potential before approving the loan.

5. Mixed-Use Properties

Some lenders permit DSCR loans on mixed-use properties, which combine residential and commercial units in a single building. Such properties must have a residential component that generates rental income.

Lenders will calculate the DSCR ratio based on the income generated by the residential component of the property rather than any commercial leases. As such, mixed-use properties are likely to carry more risk and require a higher down payment and stricter lending terms.

6. Ineligible Properties

Although DSCR loans offer extensive financing options, they cannot be used for primary residences or non-income-generating properties. Properties that are vacant, uninhabitable, or extensively under renovation will not qualify unless the lender has specific DSCR loan programs designed for properties that need repairs. Fix-and-flip properties, raw land, and owner-occupied homes also do not qualify.

DSCR Loans vs. Traditional Mortgages

While DSCR mortgages and traditional mortgages both finance real estate purchases, the qualification criteria, approval process, and property eligibility are very different. This is why investors need to be able to differentiate the two and find the best option for their financing needs.

DSCR loans offer quick approvals and have fewer documentation requirements, making them the best option for investors who need rapid and flexible financing. They do, however, come with a higher interest rate and down payment requirements. This makes DSCR loans less cost-effective for those who qualify for traditional mortgages.

FAQs About DSCR Loans

Who should consider a DSCR loan?

A DSCR loan is ideal for real estate investors who want to finance rental properties without verifying personal income. It is beneficial for the self-employed, multiple property owners, and those seeking tax write-offs.

Can I use a DSCR loan for an Airbnb or short-term rental?

Yes, DSCRs are acceptable on Airbnb and VRBO properties. However, because rental incomes fluctuate, most lenders will require a higher DSCR (1.5 or higher).

How long does it take to close a DSCR loan?

It takes 2-4 weeks to close DSCR loans as compared to 45-60 days with a traditional mortgage.

How many times can you use a DSCR loan?

There is no limit to the number of DSCR loans that may be taken out by an investor as long as any new property acquires the lender's DSCR requirements and you qualify based on credit score, down payment, and reserve requirements.

While traditional mortgages typically limit you to 10 financed properties, DSCR loans do not have an upper limit on the number of loans that can be taken.

What is the downside to a DSCR loan?

While DSCR loans offer flexibility and easier qualification for real estate investors, they come with a few drawbacks, including:

• Higher interest rates: Usually 7-10%, compared to 6-8% for conventional loans.
• Larger down payments: Most lenders require 20-25% down, whereas conventional loans may require as little as 3-20%.
• Strict DSCR requirements: Many lenders require a minimum DSCR of 1.25, and some property types (such as short-term rentals) may require 1.5 or higher.
• Prepayment penalties: Some DSCR loans charge fees if the loan is refinanced or paid off within 3-5 years.

What DSCR is required for a loan?

The minimum DSCR requirement varies by lender, but most require a DSCR of at least 1.25. Some lenders accept as low as 1.0, which means the property's rental income just covers the mortgage payment. However, loans with lower DSCR ratios often come with stricter terms, such as higher interest rates, larger down payments, or additional cash reserves.

Why Truss Financial Group is Trusted By So Many

Truss Financial Group specializes in DSCR loans designed to help real estate investors secure financing quickly and efficiently.

Here's why so many borrowers like you trust us:

• Competitive Interest Rates

  We offer some of the most competitive DSCR loan rates in the industry, helping investors reduce borrowing costs and maximize cash flow.

• Fast Approval Process

  Time is critical in real estate investing. Our streamlined application and underwriting process allows for quick approvals so you can capitalize on investment opportunities without delays.

• Flexible Loan Terms >

  No two investments are the same, which is why we offer customized loan terms that align with your financial strategy and property goals. Whether you need an interest-only option or a longer loan term, we have solutions that fit your needs.

• Expertise in Investment Property Financing

  Our team has decades of experience in DSCR lending. We provide tailored guidance and financing solutions for both new and experienced investors. Whether you’re buying, refinancing, or expanding your portfolio, we help you navigate the loan process with confidence.

Conclusion

It is essential to have a clear understanding of DSCR loans and what factors impact your loan application. Apart from empowering investors as a financing option, DSCR loans carry their share of risks, which are important to consider before applying.

These vary from situation to situation. If you’d like to know which risks and benefits apply to your financial circumstances, we are always ready to help.

Get Started with Your DSCR Loan Today

Are you prepared to move forward in your investing career? Now is the time to apply for your DSCR loan with Truss Financial Group!

Apply Now