DSCR Loans Explained: Qualify Based on Rental Income

What if you could qualify for an investment property loan based on the property's income—not yours? That's exactly what DSCR loans offer.

What Is a DSCR Loan?

DSCR stands for Debt Service Coverage Ratio. These loans qualify you based on whether the rental property generates enough income to cover its mortgage payment.

The formula: DSCR = Monthly Rental Income / Monthly Mortgage Payment (PITIA)

Example:

• Monthly rent: $2,500
• Mortgage payment (PITIA): $2,000
• DSCR: 2,500 / 2,000 = 1.25

A DSCR of 1.25 means the property generates 25% more income than needed to cover the mortgage.

Why DSCR Loans Exist

Traditional lenders look at your W-2 income, tax returns, and debt-to-income ratio. This creates problems for:

• Self-employed investors with complex tax returns
• Real estate professionals who show losses on paper
• Experienced investors with many properties affecting DTI
• Anyone who doesn't fit the conventional box

DSCR loans solve this by asking one question: Does the property pay for itself?

DSCR Loan Requirements

Minimum DSCR Ratio

• Most lenders: 1.0-1.25 minimum
• Better rates: DSCR of 1.25+
• Some lenders: Allow below 1.0 with larger down payment

Down Payment

• Typical: 20-25%
• Lower DSCR: May require 25-30%

Credit Score

• Minimum: Usually 660-680
• Better rates: 720+

Property Types

• Single-family rentals ✓
• 2-4 unit properties ✓
• 5+ unit (case by case)
• Short-term rentals (Airbnb) ✓ with some lenders
• Condos ✓ (non-warrantable may work)

Experience

• Most lenders: No experience required
• Some: Require 1-2 previous properties

DSCR vs Conventional Loans

How Rental Income Is Calculated

Lenders verify rental income using:

1. Current lease (if property is rented)
2. Appraiser's rent schedule (market rent estimate)
3. Comparable rentals in the area

They use the lower of actual rent or appraised market rent.

For short-term rentals, some lenders use:

• 12-month AirDNA projections
• Actual STR income history
• Conservative seasonal estimates

Sample DSCR Loan Scenario

Property: 4-unit building for $500,000

This property qualifies easily with a 1.37 DSCR. No personal income documentation needed.

Pros and Cons of DSCR Loans

Pros

✅ No personal income verification ✅ No tax returns required ✅ Unlimited properties (no 10-property cap) ✅ Faster closing (2-3 weeks) ✅ Can be LLC/entity owned ✅ Scale quickly

Cons

❌ Higher interest rates ❌ Larger down payment ❌ Higher fees ❌ Property must cash flow ❌ Some prepayment penalties

Who Should Use DSCR Loans?

Ideal candidates:

• Self-employed with complex taxes
• Full-time investors scaling portfolios
• High-income earners maxed on conventional
• Anyone with strong rental income but weak personal DTI

Consider conventional instead if:

• You have straightforward W-2 income
• You want the lowest possible rate
• You're buying your first 1-4 properties
• The property barely cash flows

DSCR Loan Tips

1. Shop Multiple Lenders

Rates and terms vary significantly. Get 3-5 quotes.

2. Improve Your DSCR

Higher rent or lower purchase price improves your ratio. Negotiate.

3. Consider Interest-Only

Some DSCR loans offer I/O periods, improving cash flow and DSCR.

4. Watch Prepayment Penalties

Many DSCR loans have 3-5 year prepay penalties. Factor this in.

5. Use for the Right Properties

DSCR works best for cash-flowing rentals, not appreciation plays.

Combining DSCR with HELOC

A powerful strategy:

1. Get HELOC on primary residence for down payment
2. Use DSCR loan for investment (no personal income needed)
3. Rental income covers both DSCR mortgage and HELOC payment
4. Repeat

This lets you scale without traditional income limits.

Ready to Explore Investment Financing?

Whether you use DSCR loans, conventional financing, or home equity, the key is finding properties that cash flow.

Learn how HELOCs can fund your investment down payment or check your pre-qualification options.