DSCR Loan for Fourplex: Finance 4-Unit Buildings Without Income Verification

Fourplexes represent the sweet spot in real estate investing: small enough to finance with residential loans, large enough to generate substantial cash flow, and perfectly positioned for economies of scale. DSCR (Debt Service Coverage Ratio) loans have become the preferred financing method for fourplex investors who want to skip the income documentation hassle and focus on what matters—the property's ability to pay for itself.

Why Fourplexes Are the Ultimate Investment Vehicle

A fourplex is the largest residential property you can buy with residential financing (1-4 units). Once you hit 5+ units, you're in commercial territory with stricter lending requirements, larger down payments, and balloon payments.

The Power of Four Units

• Diversified income: One vacancy = 75% income remains
• Economies of scale: One roof, one foundation, shared systems
• Easier management: All tenants in one location
• Lower per-unit cost: Often 30-40% less than four single-family homes
• Commercial-like returns: 8-12% cap rates with residential financing
• Maximum residential leverage: Up to 80% LTV with DSCR loans

Real Case Study: Fourplex in Phoenix, Arizona

The Investor: David, 42, owns 3 single-family rentals
The Property: 1970s fourplex, each unit 750 sq ft, 2-bed/1-bath
Purchase Price: $765,000
Down Payment: $191,250 (25%)
Loan Amount: $573,750
Interest Rate: 7.0%
Credit Score: 735

The Income Analysis

All four units were occupied with month-to-month tenants:

• Unit 1: $1,425/month
• Unit 2: $1,425/month
• Unit 3: $1,350/month (slightly smaller)
• Unit 4: $1,500/month (renovated kitchen)
• Total gross rent: $5,700/month

The lender verified current leases and applied a 25% reduction for vacancy/expenses:

• Qualifying income: $5,700 × 0.75 = $4,275/month

Monthly Expenses:

• Mortgage (P&I): $3,815
• Property taxes: $720
• Insurance: $340
• Water/sewer (owner pays): $280
• Total PITIA: $5,155

DSCR Calculation: $4,275 / $5,155 = 0.83 ❌

This was below the 1.0 threshold. David had several options:

Option 1: Increase down payment to 30% to lower the mortgage payment
Option 2: Show market rent potential (units were below-market)
Option 3: Accept sub-1.0 DSCR pricing

David chose Option 2. Market research showed comparable units renting for $1,550-1,650/month. The appraiser's Form 1025 (Small Residential Income Property Appraisal Report) estimated market rent at:

• Per unit: $1,575/month
• Total: $6,300/month
• After 25% reduction: $4,725 qualifying income

New DSCR: $4,725 / $5,155 = 0.92

Still short of 1.0, but David combined strategies: He increased his down payment to 27.5% ($210,375), reducing his loan to $554,625.

Final numbers:

• New mortgage: $3,687
• New total PITIA: $5,027
• DSCR: $4,725 / $5,027 = 0.94

With a 0.94 DSCR and 735 credit score, David qualified at 7.25% (0.25% premium for sub-1.0 DSCR). He accepted the rate because:

1. He could raise rents to market within 12 months
2. Immediate cash flow of $475/month (using market rents)
3. Built-in value-add opportunity worth $90,000+

18-Month Update

After renovating two units ($12,000 total), David raised all rents to $1,625/month:

• New gross income: $6,500/month
• Actual DSCR: $4,875 / $5,027 = 0.97
• Monthly cash flow: $850 (after reserves)

He's planning a cash-out refinance in Year 3 when the property appraises at $895,000 to pull equity for his next fourplex.

Understanding Fourplex DSCR Requirements

Down Payment Breakdown

Fourplex properties typically require:

• 25% standard for most programs and strong DSCR (1.15+)
• 20% possible with excellent credit (740+) and DSCR of 1.25+
• 30% for DSCR 0.85-0.99 or credit 660-699
• 35-40% for DSCR below 0.85 (rare, case-by-case)

Some lenders treat fourplexes more conservatively than duplexes/triplexes due to higher operational complexity.

Credit Score Impact on Pricing

DSCR Targets for Optimal Approval

• 1.35+: "A+" pricing, 20% down possible
• 1.25-1.34: Excellent, standard 25% down
• 1.15-1.24: Good, competitive rates
• 1.0-1.14: Acceptable, 25-30% down
• 0.85-0.99: Requires compensating factors (high credit, more down payment)
• Below 0.85: Very difficult, consider hard money or seller financing

How Lenders Calculate Fourplex Rental Income

Method 1: Actual Rent Roll (Best Case Scenario)

If all four units are occupied with leases:

• Lender obtains rent roll from seller
• Verifies lease agreements
• Uses actual rent amounts
• Applies 25% vacancy/expense factor

Example:

• Unit rents: $1,400, $1,450, $1,450, $1,500
• Gross: $5,800
• Qualifying income: $5,800 × 0.75 = $4,350/month

Method 2: Form 1025 Appraisal (Most Common)

Appraiser completes Fannie Mae Form 1025 for 2-4 unit properties:

• Researches 3-6 comparable fourplex rentals
• Analyzes market rent per unit
• Provides opinion of market rent for subject property
• Applies 25% reduction

This is the standard for vacant properties or when current rents are questionable.

Method 3: Hybrid Approach

Some lenders will:

• Use higher of actual rent or appraised rent per unit
• Accept signed lease agreements from new tenants pre-closing
• Consider "as-renovated" rents with detailed improvement plans

Pro tip: If you're buying a fourplex with below-market rents, ask if the lender will consider market rent based on planned improvements. Some lenders allow this if renovation costs are included in the loan.

Special Consideration: Tax Returns vs. DSCR

Traditional fourplex loans require tax returns showing rental income (Schedule E). This hurts investors because:

• Depreciation reduces taxable income
• Legitimate expenses lower qualifying income
• First-year losses common

DSCR loans ignore your tax returns entirely—they only care about the property's cash flow. This typically adds $200,000-500,000 in buying power for active investors.

Case Study: Out-of-State Fourplex Investment

The Investor: Jennifer, 39, lives in San Francisco, buying in Memphis
The Challenge: Never been a landlord, buying sight-unseen
The Property: 1985 fourplex, 1,000 sq ft units, 3-bed/2-bath each
Purchase Price: $485,000
Down Payment: $121,250 (25%)
Loan Amount: $363,750

The Strategy

Jennifer wanted cash flow her Bay Area salary couldn't buy locally. She researched Memphis landlording and found a turnkey fourplex listed by a property management company.

Current financials:

• All units occupied: $1,200/month each
• Gross income: $4,800/month
• Property taxes: $380/month
• Insurance: $195/month
• Property management (8%): $384/month

Initial DSCR analysis:

• Qualifying income: $4,800 × 0.75 = $3,600
• Mortgage: $2,417
• Total PITIA: $2,992 (before property management)
• DSCR: $3,600 / $2,992 = 1.20 ✓

But here's the catch: Some lenders include property management in PITIA for out-of-state investors:

• PITIA with management: $3,376
• New DSCR: $3,600 / $3,376 = 1.07

Still approved, but at a slightly higher rate (7.35% vs. 7.15%) due to out-of-state investment.

The Reality Check

Jennifer's actual first-year expenses:

• Mortgage, taxes, insurance: $2,992
• Property management: $384
• Maintenance/repairs: $425/month average
• Vacancy (one unit, 45 days): -$1,800 annual / $150/month
• Total expenses: $3,951/month

Actual cash flow: $4,800 - $3,951 = $849/month

Better than projected because rents were below market. After year one, she raised rents to $1,275/month ($300/month total increase), boosting annual cash flow by $3,600.

Maximizing Your Fourplex DSCR Approval

Strategy 1: The Value-Add Play

Look for fourplexes with:

• Dated interiors (1980s-90s fixtures)
• Below-market rents
• Poor management (owner-operated, not professional)
• Deferred maintenance that's cosmetic, not structural

Example value-add:

• Purchase price: $650,000
• Current rent: $1,200/unit = $4,800/month
• Renovation: $40,000 ($10,000/unit for paint, flooring, appliances)
• Post-renovation rent: $1,450/unit = $5,800/month
• Increased NOI: $12,000/year
• Added value (at 7% cap rate): $171,000

Some DSCR lenders offer renovation loans up to 80% LTV including improvement costs. You can use projected "as-stabilized" rents for DSCR calculation.

Strategy 2: Assumable Seller Financing + DSCR

Creative structure:

• Seller has existing mortgage at 4.5% with $300,000 balance
• You assume seller's loan (if allowed)
• Get DSCR loan for remainder
• Blended rate is lower than full DSCR loan

Example:

• Purchase: $800,000
• Assume seller loan: $300,000 at 4.5%
• DSCR loan: $300,000 at 7.25%
• Your down payment: $200,000
• Blended rate: 5.875%
• Lower payment = higher DSCR = better approval

Strategy 3: "1031 Exchange + DSCR" Power Move

Selling another rental property? Use 1031 exchange:

• Roll capital gains tax-free into fourplex
• Larger down payment (from previous property equity)
• Lower DSCR loan amount = easier approval
• Better cash flow from day one

DSCR lenders are 1031-friendly and can close in 21-30 days—within exchange timelines.

Strategy 4: Seller-Assisted DSCR Qualification

If DSCR is borderline:

• Negotiate seller credit for repairs/improvements
• Use credit to increase property value/rents
• Or negotiate partial seller financing for 5-10% of price
• Reduces DSCR loan amount, improving ratio

Fourplex Operating Expenses: Budget Accurately

Many investors underestimate fourplex operating costs:

Realistic Expense Breakdown (% of Gross Rent)

• Property taxes: 10-20% (varies by location)
• Insurance: 5-8% (higher in flood/fire zones)
• Property management: 8-10%
• Maintenance: 10-15% (older buildings higher)
• Utilities (if owner-paid): 5-10%
• Vacancy: 5-10%
• CapEx reserves: 8-12% (roof, HVAC, parking lot)

Total operating expenses: 50-65% of gross rent

Using the "50% rule" (expenses = 50% of rent) is a good starting point for quick analysis.

Example fourplex:

• Gross rent: $6,000/month
• Operating expenses (50%): $3,000/month
• Net operating income: $3,000/month
• Mortgage payment: $2,800/month
• True cash flow: $200/month

Many investors think they'll cash flow $1,500/month (gross rent minus mortgage) and are disappointed when reality hits. Plan conservatively.

Fourplex DSCR Loan vs. Commercial Financing

Scenario: $900,000 fourplex

DSCR loans offer residential benefits (longer amortization, no balloon payment) while focusing on property cash flow—best of both worlds for fourplex investors.

Frequently Asked Questions

Can I use a DSCR loan for my first investment property?

Yes! Unlike conventional loans that often require landlord experience for 3-4 unit properties, DSCR loans only care about the property's income. First-time investors are welcome.

What if some units are vacant when I buy?

The lender uses appraised market rent for all units, whether occupied or vacant. However, having leases in place can sometimes result in higher qualifying income if actual rents exceed appraised rents.

Do I need professional property management?

Not required, but recommended for fourplexes. Managing four tenants is a part-time job. Many lenders prefer to see professional management, especially for out-of-state properties.

Can I live in one unit and rent the other three?

Yes, though DSCR lenders typically won't count the owner-occupied unit's rent. You'll qualify based on three units only. For owner-occupied fourplexes, FHA loans (3.5% down) might be better if you qualify.

How much should I budget for reserves?

Expect lenders to require 6-12 months of PITIA in reserves. For a $5,000/month payment, that's $30,000-60,000 liquid. Higher for first-time investors or out-of-state properties.

What's the maximum number of fourplexes I can own?

With DSCR loans, there's no hard limit (unlike conventional loans capped at 10 financed properties). Lenders evaluate each property on its own merit. Investors commonly own 5-20+ fourplexes financed with DSCR loans.

Are DSCR loan rates higher for fourplexes?

Rates are typically the same for 1-4 unit properties. Some lenders add a small premium (0.125-0.25%) for fourplexes compared to single-families, but not always.

Can I do a cash-out refinance on a fourplex?

Absolutely. DSCR cash-out refinances are popular for pulling equity to buy more properties. Typically 75% LTV maximum, meaning if your fourplex is worth $1,000,000, you can borrow up to $750,000.

What if the fourplex needs major repairs?

Look for DSCR renovation loans (sometimes called "rehab DSCR loans"). Lender includes purchase price + repair costs in the loan amount, funds are held in escrow, released as work is completed. Typically 80% LTV.

Getting Started with Your Fourplex Investment

Fourplexes offer serious investors the opportunity to build substantial monthly cash flow ($1,000-3,000+ per property) with the convenience of residential financing. As your portfolio grows, owning five fourplexes generates the income of 20 single-family rentals—but with far less driving, fewer roofs to replace, and economies of scale that single-families can't match.

DSCR loans remove the biggest barrier: qualifying based on your personal income. Instead, the property's numbers tell the story.

Ready to finance your first fourplex? Our DSCR loan specialists understand multi-family investing and can run your numbers in under 24 hours.

Get your free fourplex DSCR quote →

We'll show you exactly how much you can borrow, what your DSCR needs to be, and help you find properties that cash flow from day one. Let's build your fourplex empire together.