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DSCR Loan

Does the rent cover the mortgage well enough to qualify?

A DSCR loan approves a rental based on its rent instead of your personal income. Enter the price, the loan terms, the expected rent, and the property’s tax and insurance to see whether it likely qualifies and what it would earn.

  1. The rent qualifies you

    A regular mortgage compares your income to your debts (your ). A loan, or DSCR loan, skips that and asks whether the rental’s rent can carry its own mortgage. No tax returns or pay stubs needed.

  2. Rent divided by the full payment

    DSCR is monthly rent divided by the full monthly payment, called (loan, property tax, insurance, and HOA dues). Example: $3,000 rent on a $2,500 payment is a DSCR of 1.20.

  3. Clear the lender’s minimum

    Most lenders want 1.0 to 1.25. Above their minimum the loan may qualify; below it you need more rent, a lower price, or more down. A loan that qualifies can still lose money, because DSCR ignores vacancy, repairs, and management.
Base the rent on similar rentals nearby. The lender’s appraiser will check your number against them, and the answer depends on it more than on any other input. To see how DSCR loans fit with other ways to finance a rental, read Real estate investing 101.
The purchase and loan

What you’d pay and the loan terms a DSCR lender quoted. Rates and fees vary a lot between lenders, so use a real quote if you have one.

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yr
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Rent and property costs

The lender divides the rent by the loan payment plus these bills. A listing or the county assessor shows property tax; an insurance agent can quote a landlord policy.

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$/yr
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Lender’s minimum DSCR
Below 1.0, the rent doesn’t cover the full payment. Most lenders require 1.0 to 1.25.

Your debt service coverage ratio (DSCR)

1.00Falls short (needs 1.00)

Monthly rent ($3,500) ÷ full monthly payment, or PITIA ($3,502) = 1.00.

Full monthly payment (PITIA)

$3,502

$2,935 loan + $567 tax, insurance, HOA

DSCR (rent ÷ payment)

1.00

lender minimum is 1.00

Meets the minimum?

Falls short

needs about $3,502/mo rent to qualify

Highest price at this rent

$499,706

keeps DSCR at exactly 1.00

Yearly cash flow

-$21

-$2/mo before vacancy and repairs

Cash-on-cash return

-0.0%

on $118,500 cash in (down, closing, points)

What this means

The rent of $3,500 covers the full $3,502 monthly payment only 1.00 times, below the lender’s 1.00 minimum. To qualify you’d need rent of about $3,502, a price of about $499,706 or less, or a larger down payment to shrink the payment. The rent falls short of the payment by about $2 a month, so you’d pay in to keep the property even before vacancy and repairs.

Cash flow here is rent minus PITIA only. Vacancy, repairs, and property management aren’t subtracted, because lenders leave them out of DSCR, but you’ll still pay them. Closing costs are estimated at 2.5% of the price. Compared with a conventional investor loan at about 1.25% lower rate, this DSCR rate costs roughly $4,088 a year in extra interest, the trade-off for not documenting your income. For vacancy, repairs, and long-term returns, run the deal through the Investment property analyzer.

What would raise your DSCR

Put 25% down instead of 20%1.05 (+0.06)
Get a 7.5% rate instead of 8%1.04 (+0.04)
Rent for $3,600 instead of $3,5001.03 (+0.03)

What makes DSCR loans different

You qualify on the property’s rent instead of your personal income, with no tax returns, W-2 verification, or test. That helps self-employed investors, people with many financed properties, and borrowers whose personal documents don’t fit conventional underwriting.

The trade-offs:

  • Rates about 1% to 2% above conventional investor loans
  • Down payment typically 20% to 25% (some lenders 15% with extra conditions), comparable to or slightly higher than a conventional investor loan (15% to 25%)
  • Origination points (1% to 3% of the loan) are common
  • Tighter requirements (typically 660 or higher; 700 or higher for the best pricing)
  • Reserves required: 3 to 6 months of the full payment (PITIA) in savings or other liquid assets after closing
  • A prepayment penalty is often included: a fee if you sell or refinance in the first few years, usually stepping down each year (for example 5%, 4%, 3%, 2%, 1% of the balance)
  • Many DSCR lenders offer interest-only options (for example 10 years interest-only, then 20 years of regular payments). The lower payment helps the DSCR pass.

DSCR is gross monthly rent ÷ PITIA, where P is principal, I is interest, T is taxes, I is insurance, and A is association (HOA) dues. Some lenders use (no HOA). Some use net rent (after vacancy and maintenance), but most use gross.

The appraiser checks your rent with Form 1007, a survey of 3 to 4 comparable rentals. The best comparisons are within about a mile, with similar square footage and features.

Some DSCR lenders accept short-term rental (Airbnb) income, usually with one of these methods: (1) a 12-month operating history from your bank statements or Airbnb account, (2) AirDNA market projections reduced by 20% to 30%, or (3) the lower of the long-term rent estimate (Form 1007) and the short-term projection. Others use long-term rent comparisons only and value the property as a long-term rental however you plan to run it. Ask before you order the appraisal.

When DSCR beats a conventional loan:

  • You have 10 or more financed properties (the Fannie Mae and Freddie Mac cap)
  • You’re self-employed with low qualifying income on your tax returns
  • Your income recently rose and isn’t on your tax returns yet
  • A past bankruptcy or foreclosure is still inside conventional waiting periods
  • You’re a foreign national investor

DSCR loans are (non-qualified mortgage), so terms vary widely by lender. Shop at least 3 DSCR lenders and compare rate, points, prepayment penalties, and reserves. See the Investment property analyzer for the full deal analysis beyond qualification. For reference, at a conventional investor rate about 1.25% lower, this property’s DSCR would be 1.11.

Results are estimates based on your inputs and the assumptions on this page, not quotes or advice. A lender, servicer, or tax advisor will give you different numbers. Disclaimer

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Terms used on this page

Terms you’ll see on a DSCR loan quote and in this calculator.

DSCR (debt service coverage ratio)
A rental’s monthly rent divided by its full monthly mortgage payment. 1.0 means the rent exactly covers the payment; 1.25 means it covers it with 25% to spare. More
DSCR loan
An investor mortgage that qualifies you on the property’s rent instead of your personal income, so no tax returns or pay stubs are needed. Rates run higher than conventional investor loans.
PITIA
Principal, interest, taxes, insurance, and association (HOA) dues: the full monthly payment a DSCR lender divides the rent by. More
Gross rent
The full rent before any expenses, vacancy, or repairs. Most DSCR lenders use gross market rent, verified by the appraiser.
Form 1007
The appraiser’s rent survey of comparable rentals nearby, used to confirm that the rent you expect is realistic.
Non-QM loan
A mortgage outside the standard “qualified mortgage” rules, usually because income isn’t verified the standard way. Terms vary widely between lenders.
Origination points
An upfront lender fee quoted as a percentage of the loan. One point is 1% of the loan, paid at closing. More
Cash-on-cash return
A rental’s yearly cash flow after the mortgage, divided by the cash you put in (down payment, closing costs, and points). More
Reserves
Savings you must still have after closing, measured in months of the full payment. DSCR lenders commonly want 3 to 6 months.
Prepayment penalty
A fee for paying off or refinancing the loan in its first few years. Common on DSCR loans, usually shrinking each year.

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