What Is a DSCR Loan and How Does It Work?
Kyl Roelofs • August 9, 2023
Real estate investing has long been a proven path to financial freedom, but traditional mortgage requirements can be a major hurdle, especially for self-employed investors or those with complex finances. That’s where a DSCR loan comes in.
A DSCR (Debt Service Coverage Ratio) loan, also known as an Investor Cash Flow loan, is a type of non-QM (non-qualified mortgage) loan that allows real estate investors to qualify for a mortgage based on a property's cash flow—not their personal income. This makes DSCR loans ideal for rental property investors who don’t want to rely on tax returns, pay stubs, or W-2s.
In this post, we’ll break down how
DSCR loans
work, what you need to qualify, and the pros and cons of using one to grow your real estate portfolio.
How Does a DSCR Loan Work?
Unlike conventional loans that require proof of income, DSCR loans assess whether a property can support itself financially. Lenders use the Debt Service Coverage Ratio (DSCR) to determine this.
The DSCR ratio compares a property's monthly rental income to its monthly expenses, including principal, interest, property taxes, homeowners insurance, and any applicable association dues.
Here’s the formula:
DSCR = Monthly Rental Income / PITIA (Principal, Interest, Taxes, Insurance, Association Dues)
If the result is 1.0 or higher, it means the rental income is enough to cover the monthly debt—and you may qualify for the loan. The higher the ratio, the safer the investment looks to the lender.
For example, if your rental property brings in $2,000/month and your monthly PITIA is $1,800, your DSCR is:
2,000 ÷ 1,800 = 1.11
This tells lenders that the property is cash flow positive and can comfortably cover its mortgage.
Who Are DSCR Loans For?
DSCR loans are designed for new and seasoned real estate investors, including first-time landlords, experienced investors, and those with unconventional financial profiles. Since the loan is based on rental income, it doesn’t matter whether the borrower is employed, self-employed, or retired.
DSCR loans are ideal for:
- First-time investors buying their first rental property
- Seasoned investors expanding their portfolio
- Investors with multiple income-generating properties
- Foreign nationals or self-employed individuals who lack traditional documentation
DSCR Loans and Non-QM Mortgages
DSCR loans fall under the broader umbrella of Non-QM loans—mortgage products that don’t conform to the standard requirements of qualified mortgages.
Other types of Non-QM loans include:
- Bank Statement Loans
- 1099 Income Loans
- Asset Qualifier Mortgages
- Foreign National Loans
- Profit & Loss Statement Loans
- WVOE (Written Verification of Employment) Loans
These types of loans provide alternative paths to
financing
for borrowers who don’t fit inside the conventional lending box.
How to Qualify for a DSCR Loan
Qualification requirements vary by lender, but here are the typical DSCR loan guidelines for both the borrower and the property.
Borrower Requirements:
- Minimum DSCR of 1.0 or higher
- Credit score or stable credit history
- Down payment of 20 percent (some lenders may allow less)
- Loan amounts between $100,000 and $3 million or more
- Proof of reserves (typically 3-6 months of mortgage payments)
Property Requirements:
- Must be an income-generating investment property
- Single-family or multi-unit residential rental (up to 4 units, sometimes more)
- Appraisal required to determine market value and rental potential
- Loan-to-value (LTV) ratio of 80 percent or less
The property must be professionally appraised before the loan is approved.
Lenders
will want to ensure that the projected rental income is sufficient to cover the monthly mortgage payments and operating expenses.
Pros of DSCR Loans
- DSCR loans offer many advantages for real estate investors:
- No income verification needed
- Minimal documentation compared to traditional loans
- Faster approval and closing process
- No limit on the number of DSCR loans you can take out
- Jumbo loan options available for high-value properties
- Flexible loan terms, including interest-only options
These features make DSCR loans especially attractive for borrowers who want to scale their real estate investments without relying on conventional income documentation.
Cons of DSCR Loans
Despite their benefits, DSCR loans do come with some trade-offs:
- Cannot be used for primary residences—only for investment properties
- Typically higher interest rates than traditional loans
- Larger down payment requirements
- Not all lenders offer them, which can limit your options
DSCR loans are also less suitable for properties that are not yet stabilized or that do not currently produce strong rental income.
How to Get a DSCR Loan
Getting a
DSCR loan
is relatively straightforward if you meet the qualifications. Here are the steps:
- Find a lender or broker who specializes in DSCR or Non-QM loans.
- Run the DSCR numbers to determine if the property qualifies.
- Submit lease agreements, property details, and a recent appraisal (or schedule one).
- Provide proof of down payment and reserve funds.
- Review and sign the loan terms.
Because DSCR loans rely on the property’s income potential, it’s important to choose a property that is already rented or likely to rent easily at a profitable rate.
Find the Right Mortgage Partner
The success of your DSCR loan largely depends on working with a mortgage professional who understands investment real estate and the nuances of Non-QM lending. Not all lenders have access to these
types of loans, and those who do may offer very different terms. If you're ready to act on a real estate opportunity with a DSCR loan, contact our team today and we’ll get you started right away.
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