Conventional mortgages qualify you on your personal income and debt-to-income ratio. That can be a problem for self-employed investors, people with many properties, or anyone whose tax returns show little taxable income after write-offs.
Debt service coverage ratio (DSCR) loans take a different approach: they qualify the property on its rental income. This guide explains how they work and what they cost.
How a DSCR loan works
A DSCR loan is a type of non-qualified mortgage (non-QM) for investment properties, most often 1–4 unit rentals. Instead of verifying your salary, the lender asks one question: does the property’s rent cover its monthly payment?
For residential DSCR loans, the ratio is usually:
DSCR = gross monthly rent ÷ PITIA
PITIA is principal, interest, property taxes, insurance and association (HOA) dues. How to read the result:
- 1.00 means the rent exactly covers the payment.
- 1.25 means the rent is 25% higher than the payment.
- Below 1.00 means the rent falls short.
Commercial and multifamily lenders often use a stricter version: net operating income ÷ annual debt service. That subtracts vacancy and operating expenses first, so the same property shows a lower ratio. Our DSCR loan calculator shows both.
Typical requirements
Terms vary widely between lenders. These are common benchmarks:
| Requirement | Typical range |
|---|---|
| Minimum DSCR | 1.00–1.25 (some “no-ratio” programs go lower) |
| Down payment | 20%–25%, more for lower ratios |
| Credit score | About 620–680 minimum; best pricing at 720+ |
| Reserves | Commonly 3–12 months of PITIA in the bank |
| Property types | 1–4 unit rentals, condos, sometimes short-term rentals |
| Borrower | Individual, or an LLC with a personal guarantee |
| Income documentation | Generally none for personal income |
Which rent counts
- Long-term rentals. Usually the lower of the signed lease and the appraiser’s estimate of market rent. For 1–4 unit homes, the market rent comes from a rent schedule attached to the appraisal, Fannie Mae’s Form 1007 or 1025.
- Vacant or newly purchased properties. Usually the appraiser’s market rent.
- Short-term rentals. Some lenders accept 12 months of booking history, or a third-party revenue projection, often reduced by a haircut for safety.
If you plan to raise the rent after purchase, the lender won’t count that yet. It underwrites today’s supportable rent.
What DSCR loans cost
DSCR loans are riskier for lenders than conventional loans, so they usually cost more:
- Higher rates. Rates are priced from your DSCR, credit score, loan-to-value, loan size and prepayment penalty choice.
- Points and fees. Origination points and underwriting fees are common.
- Prepayment penalties. Often a step-down structure, such as 5-4-3-2-1 (5% in year one, falling to 1% in year five), or a flat 3-year penalty. Choosing a longer penalty usually buys a lower rate.
Always compare offers on APR and total cost over the time you expect to hold the loan, not just the note rate.
A worked example
A single-family rental earns $2,800 a month. Taxes are $4,200 a year and insurance $1,800, with no HOA. The investor wants a $280,000, 30-year loan at 7.25%.
- Principal and interest: $1,910.09. Taxes and insurance add $500 a month, so PITIA is $2,410.09.
- DSCR = $2,800 ÷ $2,410.09 = 1.16.
- That clears a 1.00 minimum but not 1.25. To reach 1.25, the investor could borrow about $255,000 instead (a bigger down payment), or support a rent of about $3,013.
How to improve your DSCR
- Increase the down payment. A smaller loan means a smaller payment.
- Buy down the rate with points, if you’ll hold the loan long enough to recoup them.
- Choose an interest-only period, if the lender calculates DSCR on the interest-only payment.
- Document higher market rent with comparable rentals, or improve the property before appraisal.
- Lower taxes and insurance. Shop insurance and review your tax assessment.
- Ask about 40-year terms or longer amortization, which some lenders offer.
DSCR loan vs. other ways to finance a rental
| Option | Qualifies on | Pros | Cons |
|---|---|---|---|
| Conventional investment loan | Your income and DTI | Lower rates, no prepayment penalty | Tax returns required; limit on financed properties |
| DSCR loan | Property rent | No personal income documentation; LLC-friendly | Higher cost; prepayment penalties |
| HELOC on your home | Your income and equity | Flexible, low closing costs | Puts your home at risk; variable rate |
| Cash-out refinance of a rental | Varies by program | Frees up equity from existing rentals | Resets the loan; closing costs |
If you’re pulling equity from your own home to fund a purchase, compare the options with the cash-out refinance vs HELOC calculator.
Questions to ask DSCR lenders
- What minimum DSCR do you require, and how does pricing change at 1.0, 1.1, 1.2 and 1.25?
- Do you calculate DSCR on the interest-only payment if I choose an interest-only option?
- Which rent do you use for my property type, including short-term rentals?
- What are the prepayment penalty options, and how does each affect my rate?
- What are the total points, fees and reserve requirements?
- Can I close in my LLC, and is a personal guarantee required?
Sources:
- CFPB mortgage resources
- Fannie Mae single-family resources (Form 1007 rent schedule)
- IRS Publication 527, Residential Rental Property