Debt Service Coverage Ratio | DSCR Loan: How to Qualify? [2024]

Amresh Singh, CEO - HomeAbroad  by Amresh Singh
15 min read
DSCR Loan Guide
  • Real estate investors seeking an alternative to traditional financing methods can find a viable solution in DSCR loans, which primarily focus on the income generated by the property rather than personal income. 
  • HomeAbroad offers DSCR loans with competitive terms to maximize your investment property returns.  

DSCR (Debt Service Coverage Ratio) loans represent a unique, investor-centric financing solution for real estate investors. These non-qualified mortgage loans stand out for their reliance on a property’s rental income rather than the personal income of the investor for qualification purposes. Often termed as No-Income Mortgage Loans within investment circles, DSCR loans bypass the need for personal income or employment verification. 

My extensive experience in assisting numerous real estate investors secure DSCR loans has provided me with deep insights into this domain. Through this guide, I aim to comprehensively unpack the workings, eligibility criteria, and application process of the DSCR loan, coupled with practical tips to build a robust DSCR ratio. 

To fully grasp the potential of these loans, it’s essential to start with the fundamentals of the DSCR loans, laying a solid foundation for understanding how these loans can be a game-changer for real estate investors. 

What is a DSCR Loan? 

A DSCR loan, short for Debt Service Coverage Ratio loan, falls under the category of Non-Qualified Mortgage (Non-QM) loans. Unlike traditional mortgages, non-QM loans are tailored for specific financial situations and don’t always adhere to the standard federal guidelines for mortgage qualification. This flexibility makes them ideal for real estate investors. Specifically, a DSCR loan allows investors to secure financing based on a property’s potential income (the income it generates from rent) rather than the investor’s personal income. 

How does a DSCR loan work? 

DSCR loans present a tailored solution for real estate investors, circumventing the limitations often found in traditional mortgage financing. Let’s explore the mechanics of DSCR loans in more detail: 

DSCR Loan Guide Infographic

Focus on Property Income: The primary distinction of a DSCR loan is its emphasis on the investment property’s positive cash flow rather than the borrower’s personal income. This approach is ideal for investors who might have a high debt-to-income ratio (DTI) or fluctuating personal income. The loan qualification is based on whether the property generates sufficient income to cover its debts, including the mortgage and other obligations. 

Flexibility for Financing Multiple Properties: One of the significant advantages of DSCR loans is the flexibility they offer in financing multiple properties without being constrained by the personal DTI limits that traditional mortgages impose. While conventional mortgages typically cap financing at 10 properties, qualifying for additional loans becomes increasingly difficult after the 2nd or 3rd property due to rising debt-to-income ratios. This challenge persists unless there’s a proportional increase in the borrower’s income. DSCR loans, on the other hand, allow investors to finance more properties by assessing each based on its own income potential without a cap on the number of properties. 

Streamlined Application: Applying for a DSCR loan is often simpler than for traditional mortgages. A key advantage is that each property is assessed independently based on its own income potential. Unlike traditional loans, where the investor’s overall financial profile heavily influences loan approval, DSCR loans evaluate the financial health of each property in isolation, simplifying the application. 

In essence, DSCR loans offer a distinct and flexible approach to financing investment properties, prioritizing the income-producing capability of the property. This strategy broadens the scope for investment, making real estate more accessible to a diverse group of investors. 

Next, we will discuss the DSCR ratio and its calculation. 

What is the Debt Service Coverage Ratio (DSCR)? 

The Debt Service Coverage Ratio (DSCR) is a critical financial metric used to evaluate an entity’s capacity to cover its debt obligations. Generally, it’s calculated by dividing the net operating income by the entity’s total debt service. 

However, in the context of real estate financing, DSCR is calculated differently. DSCR loan ratio takes the property’s annual gross rental income and divides it by its annual debt obligations, which include the mortgage payment (both principal and interest), insurance, taxes, and HOA fees, if applicable. 

DSCR Ratio Formula

To clarify, while Net Operating Income (NOI) represents your rental income after deducting expenses like property management and maintenance, gross rental income is the total rental income before these expenses are subtracted.  

Lenders prefer this measure for DSCR calculations in investment property loans as it provides a more direct view of the property’s income-generating potential relative to its debt obligations. Essentially, a property that can generate enough cash flow to comfortably cover its debts is seen as a viable candidate for a DSCR loan. 

How can you calculate the DSCR? 

The generic DSCR ratio formula is net operating income divided by total debt service, but in the context of real estate financing, lenders use a slightly different approach or calculation. 

DSCR Ratio = Gross Rental Income/PITIA 

Gross rental income: Rental Income generated from the investment property before expenses 
PITIA = Principal, Interest, Taxes, Insurance, HOA (if applicable) 

DSCR Calculation Example: 

Suppose you’re looking to buy a rental property that brings in $2,500 per month in gross rental income. Your monthly mortgage breakdown is as follows: 

  • Principal: $900 
  • Interest: $300 
  • Taxes: $175 
  • Insurance: $50 
  • HOA Fees: $65 

To calculate the DSCR: 

DSCR Ratio = Gross Rental Income / PITI + HOA (Principal + Interest + Taxes + Insurance + HOA Fees) 
DSCR Ratio = $2,500 / ($900 + $300 + $175 + $50 + $65) 
DSCR Ratio = $2,500 / $1,490 
DSCR Ratio = 1.68 

This ratio of 1.68 indicates that the rental income sufficiently covers the property’s debt obligations and then some, which is favorable for loan approval. 

DSCR Ratio Calculator 

Don’t like math? We have created a DSCR calculator to do the job for you. Simply provide the required details and let the calculator do the work for you. 

Who can benefit from DSCR loans? 

DSCR loans cater to a diverse range of real estate investors, particularly beneficial in the following scenarios: 

  1. Investors with Non-Traditional Documentation: These loans are a boon for investors who might not have typical documentation like paystubs or W-2 forms, which are usually required for conventional mortgages. By focusing on the property’s income potential, DSCR loans offer a pathway to financing without standard paperwork. This is why DSCR loans are sometimes referred to as no income mortgage loans or investor cash flow loans. 
  1. Investors with Multiple Properties: For those managing several investment properties, maintaining a low debt-to-income ratio for conventional loan qualification can be challenging. DSCR loans are structured to accommodate investors with multiple mortgages, focusing on the income generated from each property. 
  1. Investors Claiming Deductions: Real estate investors often take advantage of tax write-offs and deductions, which can reduce their taxable income. This reduction can be a hurdle in qualifying for traditional mortgages. DSCR loans sidesteps this issue by emphasizing the investment property’s income over the investor’s personal income for loan qualification. 

What are DSCR loan requirements? 

Following is the list of basic requirements to help you gauge what is needed to qualify for a DSCR loan. 

1. DSCR ratio of 1 or higher: 

Optimal Ratio: Achieving a DSCR ratio of 1 means your rental income precisely covers your debt obligations, meeting the basic threshold for a DSCR loan. A higher ratio is preferable as it indicates that the property’s income comfortably exceeds its debts, presenting a lower risk to lenders and potentially leading to more favorable loan terms. 

Lower Ratios: While a DSCR ratio below 1 can still be eligible for a loan, it often entails conditions like higher down payments and interest rates due to the increased risk. 

DSCR based interest rate adjustment

DSCR Calculator: To quickly and easily calculate your property’s DSCR ratio, consider using our convenient DSCR calculator. This tool can help you gauge your property’s financial standing and better prepare your loan application. 

2. Downpayment of 20%-25%: 

Significance of Down Payment: While proof of personal income may not be a requirement for DSCR loans, lenders typically compensate for this by requiring a larger down payment. This ensures your commitment to the investment and establishes a substantial equity stake in the property. 

Variability in Requirements: The exact down payment percentage can vary depending on the credit policy, the property’s DSCR, and your credit score. Generally, real estate investors should expect a down payment of 20%-25%. 

Impact on Loan Terms: The size of your down payment can influence your loan’s terms. A larger down payment might result in more favorable conditions, such as a lower interest rate or a larger loan amount, reflecting the reduced risk for the lender. 

3. Credit score of 620 or higher: 

Credit Score Relevance: Despite a DSCR loan’s focus on property income, a minimum credit score of 620 is usually required. Your credit score is a reflection of your past repayment behavior and financial responsibility, which is crucial for assessing risk. 

Influence on Loan Terms: A higher credit score can significantly improve the terms of your loan, potentially leading to lower down payment requirements and more favorable interest rates. 

4. Property appraisal and 1007 rent schedule: 

Purpose of Property Appraisal: An appraisal is ordered to determine the current market value of your property. This assessment is crucial for lenders to decide the maximum amount they can lend you based on the property’s value. 

Role of the 1007 Rent Schedule: Along with the appraisal, the appraiser completes a 1007 rent schedule, a form used to report the fair market rent of your property. This information is integral to calculating your DSCR ratio, as it reflects the income potential of the property.  

Existing Leases: If your property is already leased at a rate higher than the determined fair market rent, this actual lease amount can be used in the DSCR calculation, potentially improving your ratio. To demonstrate timely rent payments, it is important to provide recent rent receipts. This will further support the reliability of your property’s income. 

5. Loan-to-Value (LTV) of 75%-80% 

Defining LTV: The Loan-to-Value ratio measures the amount of money you borrow relative to the value of your property. For instance, if you’re buying a property worth $100,000 and taking out an $80,000 loan, your LTV is 80%, as you’re borrowing 80% of the property’s value. 

LTV and Down Payment: With a required down payment of 20-25%, your LTV typically ranges between 75%-80%. This down payment ensures you have substantial equity in the property from the start. 

Impact on Loan Terms: A higher LTV means more risk for the lender, as it implies less equity from the borrower. This increased risk can lead to higher interest rates. 

DSCR loan rate adjustment based on credit score and LTV

Understanding your LTV ratio is crucial, as it not only affects your interest rate but can also influence the overall terms of your loan, impacting both your upfront and long-term financial commitments in the property. 

6. Cash reserves 

Reserve Requirement: You may be required to have cash reserves, typically equivalent to 6 to 12 months of mortgage payments, particularly if you are a first-time investor, have a lower credit score, or if your property’s DSCR ratio is below 1. These reserves act as a safety net, ensuring you can cover mortgage payments in unforeseen circumstances. 

Forms of Reserves: It’s important to note that “cash reserves” can include assets like stocks, bonds, 401k plans, and other investments, in addition to liquid cash in your bank account. 

Varied Based on Circumstances: The requirement for cash reserves is not fixed for all. It varies depending on your specific situation, such as your investment experience and the type of property you’re purchasing. For example, short-term rentals might necessitate higher reserves due to their potentially fluctuating income streams.  

Having adequate cash reserves is a vital aspect of securing a DSCR loan, providing lenders with additional assurance of your financial stability and ability to manage the property effectively.

DSCR loan requirements for Short-Term Rentals – Airbnb or VRBO 

Investing in short-term rental properties, such as Airbnb or VRBO rentals, can be highly profitable. However, when it comes to obtaining a Debt-Service Coverage Ratio (DSCR) loan for such investments, there are special considerations due to the fluctuating income these properties often experience. 

If you’re considering a DSCR loan for a short-term rental property, here’s what you need to know in addition to maintaining a DSCR ratio of 1 or higher: 

1. Credit Score of 680 or Higher: 

Short-term rentals can have variable income, making them a higher risk for lenders. A stronger credit score demonstrates your financial reliability and capability to handle these fluctuations, reducing the perceived risk. 

2. At least 1 Year Experience with Short-Term Rentals: 

Lenders typically look for borrowers with over a year of experience in managing short-term rentals. This experience suggests you have the know-how to maintain occupancy and manage the unique challenges of short-term letting. Without this experience, you might face a requirement for a higher down payment. 

3. Vacancy Rate Below 50%: 

A lower vacancy rate is indicative of a well-booked property and, by extension, income stability. Lenders consider this as a favorable factor, suggesting that the property is a less risky investment. 


In addition to the requirements outlined, remember that DSCR loans are intended specifically for investment properties, not primary residences. As part of the application process, you’ll likely need to sign a document confirming your intent to use the property for investment purposes.

It’s important to recognize that the requirements mentioned are general guidelines. The eligibility criteria for loans can differ based on your specific situation, and the terms may vary. It is crucial to explore your options thoroughly to secure the best deal for your investment. 

At HomeAbroad, we offer DSCR loans tailored to your unique investment needs. Our extensive lender network enables us to provide loan terms optimized for maximizing your investment returns. 

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I was on the verge of closing a deal with a DSCR lender I found after painstaking research, but I came across HomeAbroad and decided to give them a chance—and thank goodness I did. They offered me a better deal and excellent support.

Sofia Rodriguez

Miami, Florida

How to apply for a DSCR loan? 

Here’s a step-by-step outline of the DSCR loan application process. This is a generalized process, and some steps may vary based on your situation. 

DSCR Loan Process

Step 1: Find a DSCR loan lender 

Start by researching private lenders that offer DSCR loans. Compare the terms from multiple lenders to find the most favorable options for your situation.  

HomeAbroad offers DSCR loans with competitive terms that maximize your investment property returns. Reach out to get started! 

Step 2: Get preapproval 

A preapproval letter from the lender can demonstrate your seriousness to property sellers. For preapproval, lenders will examine your credit and asset documentation. It’s essential to satisfy credit criteria and maintain a minimum of 3 months’ worth of cash reserves. 

Step 3: Apply for the Loan 

After finding the right property and completing the due diligence, submit the loan application with all required documents and details. 

Required Documents for DSCR Loans: 

  • Credit Report 
  • 2 Months’ Bank Statements (for cash reserve verification) 
  • Appraisal 
  • 1007 Rent Schedule 
  • Homeowners Insurance 
  • Entity Documentation (If buying under LLC) 

Step 4: Underwriting 

Once you apply for a loan, your loan officer will review your application and provide you with a loan estimate that will include the terms of the loan. If you decide to accept that loan estimate, your loan application will then be forwarded to an underwriter. The underwriter will thoroughly evaluate your application and supporting documents according to the lending guidelines to make the final decision.

Step 5: Approval 

Upon analyzing your profile, the underwriter will either approve, decline, or approve with conditions.

Step 6: Closing 

Once you have received approval, you will be ready to close on your property. Your loan officer will provide you with a closing disclosure at least three days before the closing date. This document will include your loan terms, monthly mortgage payments, and final closing costs that you will be responsible for paying on the day of closing.

If you agree with the closing disclosure, you can proceed with accepting your mortgage and signing the necessary paperwork to officially take ownership of the property.

Congratulations on your new investment property! You are now the proud owner.

In this process of applying for a DSCR loan, the key to a smooth loan application is choosing a DSCR lender that offers terms that align with your investment strategy. 

At HomeAbroad, we offer DSCR loans and are committed to providing you with the best loan terms to maximize your investment returns.

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What are DSCR loan interest rates? 

DSCR loan interest rates typically run about 0.5% to 1.5% higher than conventional mortgage rates. This is due to the unique nature of these loans and the increased risk of the lender. 

To stay informed about the most current rates, visit our regularly updated DSCR loan interest rates page. Keep in mind that the exact rate you’re offered can vary depending on several factors, including your chosen lender, the DSCR ratio of your property, your credit score, and your down payment. 

If you’re looking for a more personalized DSCR loan interest rate, please fill out the form below. We’ll provide you with tailored DSCR loan rates and the most favorable loan terms for your unique investment scenario. 

Who offers DSCR Loans? 

DSCR loans, classified as non-QM loans, are offered by private lenders and are not part of Government-Sponsored Enterprises (GSEs) like Fannie Mae and Freddie Mac. This means they are not regulated by the government, leading to significant variations in terms and conditions from one lender to another. 

Given this variability, it’s crucial to shop around and compare different DSCR lenders to secure the best deal. However, finding the right lender can be more challenging and time-consuming than with conventional mortgage lenders, as not all private lenders offer DSCR loans, and those that do may have differing requirements and terms. 

At HomeAbroad, we offer DSCR loans that are tailored to meet your unique needs. We’re committed to offering you the most competitive terms for your specific case, ensuring that you get a deal that best supports your investment goals. 

When I ventured into short-term rental investment a year ago, I found HomeAbroad during my research. Among all the offers I had, HomeAbroad stood out with the best deal. Fast forward to now, for my second property investment, I knew exactly where to go. Once again, HomeAbroad gave me the deal.

Jordan Fisher

Orlando, Florida

Can you refinance with DSCR loans? 

Yes, refinancing with DSCR loans is possible and operates similarly to conventional loan refinancing. This option is particularly advantageous for BRRRR (Buy, Rehab, Rent, Refinance, Repeat) investors looking to transition from hard money loans to more sustainable long-term DSCR financing. 

When considering refinancing your DSCR loan, the following criteria are typically essential: 

  1. Loan-to-value ratio (LTV): The LTV should be around 75% or less. 
  1. Credit score: Maintain a credit score of 620 or higher. 
  1. Debt Service Coverage Ratio (DSCR): Ensure a DSCR ratio of 1 or higher. 
  1. Experience: Typically, a minimum of 1 year of experience in real estate investment is required. 
  1. Cash reserves: Maintain sufficient cash reserves as per the lender’s requirements. 

Meeting these criteria can open up opportunities for refinancing, which may lead to more favorable loan terms or rates, ultimately improving your investment’s cash flow and potential for growth. 

Additionally, if the combined cost of your property’s purchase, rehab, and mortgage closing is equal to or less than 75% of its After Repair Value (ARV), you might qualify for 100% financing leverage. 

DSCR loans are also known for their unlimited cash-out refinancing options, allowing you to leverage equity in your property for further investments or renovations. 

HomeAbroad offers refinancing with DSCR loans, and we are committed to giving you the best terms to fit your investment strategy and financial goals. 

How does cash out refinance work with DSCR loans? 

Cash-out refinancing with a DSCR loan offers a strategic way to access the equity you’ve built up in your investment property, including any appreciation in its value. 

DSCR loans offer the flexibility of unlimited cash-out refinancing, which means that you can extract equity from your property as its value increases through mortgage payments or property appreciation. This equity can be used to invest in additional properties or fund renovations.  

In the case of cash-out refinance, most DSCR lenders require a Loan-to-Value ratio of 75% to ensure that you retain some equity in the property, which is essential for financial balance and risk management.  

Additionally, to guarantee the stability and performance of the investment before allocating additional funds, many lenders have a “seasoning” requirement that obligates you to own the property for a specific period, usually between 3 to 6 months, before you’re eligible for refinancing. 

The right lender can significantly impact the profitability of your investment. It’s important to choose a lender whose terms align with your investment strategy and long-term goals. 

HomeAbroad provides cash-out refinance with DSCR loans, and we can guarantee you optimal terms to maximize your investment property profitability. 

Can foreign real estate investors use DSCR loan to purchase investment property in the USA?

The US real estate market continues to attract significant interest from foreign investors. In 2023, foreign real estate investors purchased an average of $53.3 billion worth of US property, according to the National Association of Realtors (NAR). However, obtaining a mortgage in the US can be challenging for foreign nationals due to the lack of a local credit history. 

For foreign real estate investors, DSCR loans present a viable solution. These loans are particularly advantageous as they do not require international buyers to have a US credit history. Instead, the focus is on the income-generating potential of the property, making it the primary criterion for loan approval. 

However, to offset the risk associated with borrowers lacking a US credit history, lenders might implement an additional overlay on interest rates for foreign buyers. An ‘overlay’ in this context refers to extra charges or stricter lending criteria imposed by lenders to mitigate risk. This might mean slightly higher interest rates compared to those offered to US residents. 

In summary, DSCR loans offer a pathway for foreign investors to participate in the US real estate market despite the challenges associated with not having a US credit history. 

At HomeAbroad, we are dedicated to simplifying the process of investing in US real estate for foreign nationals. We offer DSCR loans to foreign investors without the need for a US credit history and provide competitive loan terms tailored to your unique investment needs. 

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Frequently Asked Questions

  1. What is considered a good DSCR ratio? 

    A good DSCR ratio typically is 1 or higher, meaning the property’s income covers all debt obligations. However, the more above 1 the ratio is, the more financially comfortable and appealing the investment is to lenders. 

  2. Can you qualify for a DSCR loan with a DSCR < 1? 

    While a DSCR ratio below 1 is less favorable, some lenders may still offer loans with certain conditions, such as higher down payments or interest rates, to offset the increased risk. 

  3. What property types can be purchased with a DSCR loan?  

    DSCR loans cover almost every type of property investors are interested in.  
      
    1. Single Family Residences (SFRs), which include Single Family Homes, Condos, and 2. Townhomes  
    3. Multifamily Properties (1-4 units)  
    4. Multifamily Properties (5+ units)  
    5. Commercial properties 

  4. How can you increase the DSCR ratio? 

    To improve your debt service coverage ratio (DSCR), you can consider increasing your rental income, extending the loan repayment period, negotiating lower interest rates, or making a larger down payment. 

  5. Does a DSCR loan have a prepayment penalty? 

    Yes, DSCR loans often include prepayment penalties to compensate lenders for potential lost earnings from early loan repayment.  

  6. How many DSCR loans can you have? 

    This is the best feature of a DSCR loan; you can get multiple DSCR loans to buy multiple investment properties. 

  7. What is a no-ratio DSCR loan? 

    A No-DSCR Loan is a lending program where the lender doesn’t calculate the Debt Service Coverage Ratio based on current rental income. Instead, these loans focus on the investors’ overall financial strength, experience, and the future income potential of the property. 

  8. What is the maximum loan amount I can borrow with DSCR loans?

    You can borrow a minimum of $75K to a maximum of $5M with DSCR loans.

Amresh Singh, CEO - HomeAbroad
About the author:
Amresh Singh is the founder & CEO of HomeAbroad and has an extensive 12+ years of experience in the financial services and mortgage industry - building business development and product strategy and leading customer strategy in the financial services industry domain.
Prior to co-founding HomeAbroad, Amresh has worked for one of read more...
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