The Complete Guide to DSCR Loans for Real Estate Investors

What Is a DSCR Loan?

A DSCR (Debt Service Coverage Ratio) loan is a type of investment property financing where qualification is based on the property’s rental income rather than the borrower’s personal income. Instead of providing tax returns, W-2s, or pay stubs, you qualify based on whether the property generates enough rent to cover the mortgage payment.

This makes DSCR loans one of the most popular financing options for real estate investors, particularly those who are self-employed, have complex tax situations, or want to scale their portfolio without being limited by personal debt-to-income ratios.

How DSCR Is Calculated

The formula is straightforward:

DSCR = Net Operating Income (NOI) / Total Debt Service

For example, if a property generates $2,500/month in rent, has $700/month in expenses (taxes, insurance, management, maintenance), and the mortgage payment is $1,400/month:

NOI = $2,500 - $700 = $1,800/month
DSCR = $1,800 / $1,400 = 1.29x

A DSCR of 1.29x means the property generates 29% more income than the debt payment requires. Most lenders want to see at least 1.0x to 1.25x.

Typical DSCR Loan Requirements

While requirements vary by lender, here’s what to expect from most DSCR programs:

Minimum DSCR: 1.0x to 1.25x. Some lenders will go down to 0.75x with additional pricing adjustments.

Credit Score: 620-700 minimum, depending on the lender. Higher scores get better rates.

Down Payment: Typically 20-25% (75-80% max LTV).

Property Types: Most DSCR lenders cover 1-4 unit residential properties, condos, and townhomes. Some also cover 5-8 unit small multifamily.

Loan Amounts: Generally $75,000 to $3,000,000, though some lenders go higher.

Loan Terms: 30-year fixed, 5/1 ARM, 7/1 ARM, and interest-only options are common.

Documentation: No tax returns, no W-2s, no personal income verification. You’ll typically need a lease or rent estimate (via appraisal), property insurance, and standard borrower identification.

Pros and Cons

Advantages of DSCR Loans

No income verification is the headline benefit. You don’t need to prove personal income, which is transformative for self-employed investors, business owners, or anyone whose tax returns don’t reflect their actual earning capacity.

Faster closings than conventional loans since there’s less documentation to review. Many DSCR lenders can close in 2-3 weeks.

Scalability — since qualification is based on the property (not your personal DTI), you can continue acquiring properties without hitting conventional loan limits. There’s no equivalent of the Fannie Mae 10-property cap.

Entity-friendly — most DSCR loans allow borrowing through an LLC, which provides liability protection.

Disadvantages of DSCR Loans

Higher rates than conventional financing. Expect rates 1-3% higher than a conventional investment property loan.

Larger down payment — typically 20-25%, compared to 15-20% for conventional investment property loans.

Origination fees — most DSCR lenders charge 1-2% origination fees on top of standard closing costs.

Prepayment penalties are common, often structured as a 3-2-1 declining penalty or a 5-year fixed penalty.

How to Choose a DSCR Lender

When comparing DSCR lenders, focus on these key factors:

Interest rate and fees: Compare the total cost of financing, not just the rate. A slightly higher rate with no origination fee may cost less than a lower rate with 2 points.
DSCR threshold: If your property’s DSCR is below 1.25x, you need a lender that accepts lower ratios.
Closing speed: If you’re competing against cash buyers, closing speed matters. Some lenders close in 10 days, others take 30+.
Prepayment terms: If you plan to sell or refinance within a few years, prepayment penalties matter significantly.
Repeat borrower benefits: If you’re building a portfolio, look for lenders that offer better terms for repeat borrowers.

Frequently Asked Questions

Can I get a DSCR loan on a property that isn’t yet rented? Yes. Most lenders will use a market rent estimate from the appraiser to calculate the DSCR for vacant properties.

Do DSCR loans show up on my personal credit? It depends on the lender and how the loan is structured. Loans to LLCs may not report to personal credit bureaus, but this varies.

What’s the minimum credit score for a DSCR loan? Most lenders require 620-680, but requirements and pricing improve significantly above 720.

Can I get a DSCR loan for a short-term rental (Airbnb)? Some lenders allow short-term rental income for DSCR calculations, but this is less common and often requires documented rental history.