If you invest in rental property, you have probably heard of the DSCR loan. It is one of the most popular ways for investors to buy and refinance rentals, because it is underwritten on what the property earns rather than what you earn. Here is how it works, in plain English.
DSCR stands for debt service coverage ratio
“Debt service” is the payment on the loan. The debt service coverage ratio compares the property’s rental income to that payment:
PITIA is principal, interest, property taxes, insurance and any HOA dues.
If a property rents for $2,600 a month and its total payment is $2,000, the DSCR is 1.30 — the rent covers the payment with 30% to spare. A DSCR of exactly 1.0 means the rent just covers the payment. Below 1.0, the property does not fully pay for itself.
Why lenders use it
A conventional mortgage asks about your personal income, employment and debts. That works for a home you live in, but it is a poor fit for an investor with many properties, a business that writes off expenses, or income that varies. A DSCR loan skips that and asks a simpler question: does this property carry itself?
Because of that, DSCR loans generally do not require tax returns, W-2s or pay stubs.
What lenders still look at
- The DSCR itself. Many programs prefer 1.0 or higher; some accept lower ratios with less leverage or a different rate.
- Credit score. Higher scores generally earn better pricing and leverage.
- Loan-to-value (LTV). A larger down payment usually means better terms.
- Property type and location. Single-family, 2–4 unit, condo and multifamily can price differently.
- Reserves. Lenders often want to see cash set aside to cover payments.
- Experience. Some programs weigh your track record as an investor.
What you can use a DSCR loan for
- Purchase a rental property.
- Rate/term refinance an existing rental into new terms.
- Cash-out refinance to pull equity out for your next deal.
Most investors close in an LLC or similar entity, which is typically fine for DSCR loans.
Pros and cons
| Pros | Cons |
|---|---|
| No personal income documentation Approve more properties without DTI limits Close in an LLC Faster, simpler paperwork | Rates are often higher than conventional loans Larger down payments are common Prepayment penalties are common Rent must support the payment |
How to find out what you qualify for
Run your numbers through our DSCR calculator to see your ratio, then use the estimator for a ballpark rate range and loan amount. When you are ready, get a quote and a loan officer will give you exact numbers.