Your First Rental Property with a DSCR Loan: A Step-by-Step Guide

Buying your first rental property is one of the most significant financial decisions you'll make — and one of the most rewarding. But if you're self-employed, a freelancer, or simply don't want to hand over two years of tax returns, traditional mortgages can feel like a brick wall.

That's where DSCR loans come in. A Debt Service Coverage Ratio loan qualifies you based on the property's income, not yours. If the rent covers the mortgage, you can get approved. Period.

This guide walks you through every step — from finding the right property to closing day — so you can confidently buy your first rental with a DSCR loan.

What Is a DSCR Loan (and Why It's Perfect for Your First Rental)

A DSCR loan is an investment property mortgage where the lender evaluates whether the property's rental income can cover the monthly debt payments. Instead of asking for pay stubs and tax returns, the lender looks at one number: the DSCR ratio.

If you're new to this concept, check out our detailed breakdown at What Is a DSCR Ratio?.

How the DSCR Ratio Works

The formula is simple:

DSCR = Gross Monthly Rent ÷ Monthly Debt Obligations (PITIA)

PITIA stands for Principal, Interest, Taxes, Insurance, and Association dues. Here's a quick example:

• Monthly rent: $2,000
• Monthly PITIA: $1,600
• DSCR: $2,000 ÷ $1,600 = 1.25

A DSCR of 1.25 means the property generates 25% more income than needed to cover the mortgage. Most lenders want a DSCR of 1.0 or higher, though some programs accept ratios as low as 0.75 with compensating factors like a larger down payment.

Why DSCR Beats Conventional for First-Time Investors

If you're a W-2 employee with a clean financial picture, conventional might save you a fraction on rate. For everyone else — entrepreneurs, gig workers, investors with complex returns — DSCR is the faster, simpler path.

Step 1: Know Your Numbers Before You Shop

Before looking at a single listing, get clear on three things:

Your Down Payment

DSCR loans typically require 20-25% down for a purchase. Some lenders offer programs at 15% down, but expect a higher rate. For a $250,000 property, plan on:

• 20% down: $50,000
• 25% down: $62,500

Don't forget closing costs, which typically run 2-5% of the purchase price ($5,000-$12,500 on a $250K property).

Your Target DSCR

Aim for a DSCR of at least 1.20. This gives you a buffer for vacancies, maintenance, and rate fluctuations. Here's what different DSCR levels mean in practice:

• 1.0: Break-even. Rent exactly covers the mortgage. Tight.
• 1.15-1.25: Healthy. Some cash flow after debt service.
• 1.30+: Strong. Good cushion for unexpected expenses.

Your Target Markets

Research markets where rental yields are strong relative to purchase prices. Midwest and Southeast markets often offer better DSCR numbers than coastal cities. Look for:

• Rent-to-price ratios above 0.7% monthly (e.g., $1,750/month rent on a $250K property)
• Low vacancy rates (under 6%)
• Population and job growth

Step 2: Get Pre-Qualified with a DSCR Lender

Unlike conventional pre-approvals that dig into your personal finances, DSCR pre-qualification is straightforward. Here's what you'll typically need:

• Credit score: Most lenders require a minimum of 660, with better rates at 720+
• Down payment proof: Bank statements showing available funds
• Property type: Single-family, 2-4 unit, condo, or townhome
• Entity documentation (optional): If purchasing through an LLC

Notice what's not on that list: tax returns, pay stubs, employment verification, or debt-to-income calculations.

At HonestCasa, pre-qualification takes minutes, not weeks. You'll know your budget and rate range before you start making offers.

Credit Score and Rate Tiers

Your credit score directly impacts your DSCR loan rate:

• 760+: Best available rates
• 720-759: Slightly above base rates
• 680-719: Mid-tier pricing
• 660-679: Higher rates, may require 25% down

Every 20-point improvement in your credit score can save you 0.25-0.50% on your rate — which translates to real money over 30 years.

Step 3: Find the Right Property

Now the fun part. But "fun" needs to be tempered with math. A property that looks great on Zillow might be a terrible DSCR deal.

Run the DSCR Calculation on Every Property

For each property you consider, calculate the estimated DSCR:

Example: A $225,000 single-family home in Indianapolis

• Purchase price: $225,000
• Down payment (25%): $56,250
• Loan amount: $168,750
• Interest rate: 7.5%
• Monthly P&I: $1,180
• Property taxes: $190/month
• Insurance: $130/month
• Total PITIA: $1,500/month
• Market rent (from comps): $1,900/month
• DSCR: $1,900 ÷ $1,500 = 1.27 ✅

That's a solid DSCR. The property cash flows roughly $400/month before maintenance and vacancy reserves.

Where to Find Rental Comps

Your DSCR lender will order a rent survey (like an appraisal for rental value), but do your own homework first:

• Rentometer.com — Quick rental estimates by address
• Zillow Rental Manager — Active listings in the area
• Craigslist/Facebook Marketplace — Real-time asking rents
• Property managers — Call a local PM and ask what similar homes rent for

Property Types That Work Best

For your first DSCR rental, keep it simple:

• Single-family homes (3bd/2ba): Easiest to rent, easiest to manage, broadest tenant pool
• Small multifamily (2-4 units): Higher DSCR potential since multiple units share one mortgage. A duplex where each side rents for $1,200 on a $1,800 PITIA gives you a 1.33 DSCR
• Avoid: Luxury properties, rural areas with thin rental markets, or anything requiring major renovation (unless you're experienced)

Step 4: Make an Offer and Go Under Contract

Once you've found a property with a DSCR of 1.20+, it's time to make an offer. A few tips:

Offer Strategy for Investors

• Don't overpay. Your DSCR ratio is sensitive to purchase price. Every $10,000 over asking reduces your DSCR.
• Include inspection and financing contingencies. Even cash-heavy investors should protect themselves.
• Use your pre-qualification letter from HonestCasa to show sellers you're a serious, funded buyer.
• Close quickly. DSCR loans can close in 21-30 days — use that speed as leverage against slower conventional buyers.

Step 5: The DSCR Loan Application Process

Once you're under contract, your lender kicks off the formal process. Here's what happens:

Documents You'll Submit

• Signed purchase contract
• Bank statements (for down payment verification)
• Credit authorization
• Entity documents (if buying in an LLC)
• Property insurance quote

What the Lender Orders

• Appraisal: Confirms the property value supports the loan amount
• Rent survey/1007 form: An appraiser determines the market rent for the property. This is the number used to calculate your official DSCR
• Title search: Confirms clear ownership

Underwriting Timeline

DSCR underwriting is faster than conventional because there's no income documentation to verify. Typical timeline:

• Week 1: Application, disclosures, order appraisal
• Week 2: Appraisal and rent survey completed
• Week 3: Underwriting review, conditions cleared
• Week 3-4: Clear to close, schedule closing

For a deeper dive into the full DSCR loan process, see our Complete DSCR Loan Guide.

Step 6: Close and Fund

Closing on a DSCR loan looks almost identical to any other mortgage closing. You'll:

1. Review and sign the closing disclosure (at least 3 days before closing)
2. Wire your down payment and closing costs to the title company
3. Sign the final loan documents
4. Receive the keys

Total cash needed at closing for our $225,000 example:

• Down payment (25%): $56,250
• Closing costs (~3%): $6,750
• Prepaid taxes/insurance escrow: ~$2,000
• Total: approximately $65,000

Step 7: Set Up for Success After Closing

Buying the property is step one. Making it profitable is the real game.

Find a Property Manager (or Self-Manage)

If this is your first rental and you live nearby, self-managing saves you 8-10% of monthly rent. But if the property is out of state or you value your time, hire a property manager. Budget 8-10% of gross rent for management fees.

Build Your Reserves

Set aside at least 3-6 months of PITIA in a savings account for:

• Vacancy (budget 5-8% of annual rent)
• Maintenance (budget 10% of annual rent)
• Capital expenditures (roof, HVAC, water heater)

On our $225K example, that's roughly $4,500-$9,000 in reserves.

Track Everything

From day one, track every dollar of income and expense. Use a tool like Stessa (free), a spreadsheet, or hire a bookkeeper. Clean financials make everything easier — taxes, refinancing, and buying property #2.

Real Example: First DSCR Rental Purchase

Let's put it all together with a realistic scenario:

Sarah, a freelance graphic designer in Austin, TX earns $120K/year but her tax returns show $65K after deductions. Conventional lenders qualify her on $65K, limiting her borrowing power. She turns to a DSCR loan.

• Property: 3bd/2ba single-family in Memphis, TN — $195,000
• Down payment (25%): $48,750
• Loan amount: $146,250 at 7.25%
• Monthly PITIA: $1,285
• Market rent: $1,650/month
• DSCR: 1.28
• Monthly cash flow (before reserves): $365
• Annual cash flow: $4,380
• Cash-on-cash return: $4,380 ÷ $55,000 (total cash invested) = 7.96%

And that's just cash flow. Add in appreciation, mortgage paydown, and tax benefits, and Sarah's total return is likely 15-20% annually.

Common Mistakes to Avoid on Your First DSCR Rental

1. Using market rent instead of appraised rent. Your DSCR is calculated on the appraiser's rent estimate, not Zillow's. Sometimes they differ.
2. Forgetting about vacancy. A DSCR of 1.0 means zero room for a single month without a tenant.
3. Skipping the inspection. Investment properties still need inspections. A $15,000 foundation issue torpedoes your returns.
4. Overleveraging. Just because you can put 20% down doesn't mean you should drain your savings. Keep reserves.
5. Ignoring insurance costs. Landlord insurance in storm-prone areas (Florida, Texas coast) can significantly increase your PITIA and lower your DSCR.

Ready to Buy Your First Rental Property?

A DSCR loan removes the biggest barrier most new investors face: qualifying based on personal income. If you can find a property where the rent covers the mortgage, you can get funded.

Apply for a DSCR loan with HonestCasa today and get pre-qualified in minutes. No tax returns. No income verification. Just smart investing backed by smart financing.

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HonestCasa is a fintech lender specializing in DSCR loans for real estate investors. Whether it's your first property or your fiftieth, we make investment property financing simple, fast, and transparent.