Debt Service Coverage Ratio (DSCR) Loans [2024]

10 min read
DSCR loan guide
  • DSCR (Debt Service Coverage Ratio) is the ratio of annual gross income to PITIA (Principal, Interest, Taxes, Insurance, HOA).
  • Real estate investors can qualify for a DSCR loan based on their property’s income rather than personal income.
  • Property should make enough income to pay for it’s mortgage payments and other obligations to qualify for a DSCR loan.
  • 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 loans stand out for their focus on a property’s rental income rather than the investor’s personal income for qualification purposes. DSCR loans are also termed No-Income Mortgage Loans because they bypass the need for personal income verification.  

My extensive experience in assisting numerous real estate investors secure DSCR loans has provided me with expertise on this topic. Through this guide, I aim to comprehensively unpack the workings, eligibility criteria, and application process of the DSCR loan. 

Let’s start with the basics.

What is a DSCR Loan? 

A DSCR loan, short for Debt Service Coverage Ratio loan, is an investment property loan program that focuses on the property’s income potential rather than the investor’s personal income for qualification. 

DSCR loan falls under the category of Non-Qualified Mortgage (Non-QM). Non-QM loans don’t usually follow the standard loan guidelines from Fannie Mae or Freddie Mac that conventional mortgages usually do.  

This means DSCR loans are a private lending product and don’t come under government regulations, resulting in a loan program that has a unique qualification method focused on property income and not personal income. 

This unique property-based qualification makes DSCR loans perfect for real estate investors who are struggling to qualify for traditional loan programs. 

Between 2018 and February 2023, approximately 50% of the 201,000 non-QM loans rated by S&P Global were DSCR loans.

S&P Global

Here is an explainer video on DSCR loans, covering basics of DSCR loans, it’s requirements, and application process.

Next, let’s understand how the DSCR loan and its property-based qualification works. 

How does a DSCR loan work? 

DSCR loans offer a great financing option for real estate investors who are unable to secure conventional mortgages. Generally, investors need to have a strong financial profile with a low DTI (Debt-to-Income) ratio to get conventional mortgages, a requirement that is not possible for all real estate investors.  

Some real estate investors have multiple properties financed at once, resulting in an increased DTI ratio and disqualifying them from getting any more conventional mortgages. Typically, it becomes increasingly difficult to secure conventional mortgages after the 2nd or 3rd property unless your income increases in proportion to the debt.  

Even if it does, investors often write off expenses to claim deductions, which reduces their true income and prevents them from obtaining a traditional mortgage for their investment property.  

DSCR loans address these challenges for investors by focusing on the property’s income potential, rendering personal income irrelevant. The only condition is that the property should be able to generate enough income to cover its PITIA (Principal, Interest, Taxes, Insurance, and HOA) to qualify for a DSCR loan.  

That’s it. There is no catch.  

Here is an representation of how different property income and PITIA cases can affect your DSCR loan qualification.

How DSCR loans work

The loan is secured by the property itself, giving lenders security in case things go south. 

As qualification depends on the property’s income, personal income and DTI ratio become irrelevant and won’t stop investors from getting the loan. 

On top of this, private lenders offer DSCR loans, and they can customize the loan terms to maximize your investment returns, an option that is not possible with conventional mortgages. 

This is how DSCR loans work; now, let’s understand what DSCR is and how it plays a role in DSCR loans.

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 is the property’s annual gross rental income divided by its annual debt obligations (PITIA). 

DSCR Ratio Formula

The difference between both calculations is that 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.  

A minimum DSCR of 1 is required to qualify for a DSCR loan, but this may vary from lender to lender. A DSCR ratio of 1 means the property’s annual gross income is equal to its PITIA. More than 1 DSCR means more income than its PITIA, and lower than 1 means underperforming property.  

Hope you understand the DSCR metric now, let’s dive into exact formula and calculation goes into DSCR to help you calculate your property’s DSCR. 

How can you calculate the DSCR? 

Here is the DSCR formula DSCR loan lenders use to calculate your property’s DSCR. 

DSCR Formula
\[ \text{DSCR} = \frac{\text{Gross Rental Income}}{\text{PITIA}} \]

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 and other costs 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, 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. 

These are the fundamentals of DSCR loans that you should know.  

Now, is it right for you?  

Let’s find out who it is for. 

Who can benefit from DSCR loans? 

While all real estate investors can potentially benefit from DSCR loans, they are particularly effective in the following scenarios: 

  1. Real estate investors who lack traditional income documentation, such as pay stubs or W-2 forms. 
  1. Investors looking to finance multiple properties to expand their portfolios. 
  1. Individuals with a high debt-to-income (DTI) ratio who cannot secure conventional mortgages. 
  1. Investors who deduct expenses, reducing their qualifying income for traditional mortgages. 
  1. Those seeking financing based on their investment property’s income. 

It’s not just me, here is what other expert has to say about DSCR loans.

Expert advice on DSCR loans from a real estate agent
Jay Thomas – Real Estate Agent (Source: BiggerPockets Forum)

Next, let’s discuss the advantages and disadvantages of DSCR loans to help you decide if these loans are right for you or not.

What are the pros and cons of DSCR loans?

ProsCons
No personal income verificationHigh down payment requirement
Flexible qualification compared to conventional mortgagesHigh interest rates
Faster application and approvalOnly for investment properties
Finance multiple investment propertiesNot for fixer-upper properties
Unlimited cash-out refinanceHigher closing costs

Expert also thinks the same. Here is a comment on DSCR loans from an investor.

Expert advice on DSCR loans from an investor
Nicholas L. – Flipper/Rehabber (Source: BiggerPockets Forum)

If you think DSCR loans are for you, let’s know the DSCR loan requirements to apply for this loan.

What are DSCR loan requirements? 

Here are the requirements you need to fulfill to get a DSCR loan. 

  1. DSCR ratio of 1 or higher
  2. Down payment of 20%-25%
  3. Credit score of 620 or higher
  4. Property appraisal
  5. 1007 rent schedule
  6. Loan-to-Value (LTV) of 75%-80% 
  7. 6-12 months of cash reserves 

These requirements are for long-term rental properties, and if you are considering short-term rental properties, there are slight changes in the requirements to consider. 

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

When it comes to DSCR loans for short-term rentals, there are special considerations due to the fluctuating income these properties often experience.  

Here are the additional requirements you need to fulfill along with the above-mentioned ones: 

  1. Credit score of 680 or higher 
  1. 1 year or more short-term rental investment experience 
  1. Vacancy rate of less than 50% 

The discussed DSCR loan requirements are general, and your exact requirements may vary depending on your lender and individual case. 

At HomeAbroad, we offer DSCR loans tailored to your unique investment needs. As an investor-centric platform, we prioritize maximizing your investment returns. Drop your details below to get a quote and exact interest rates for you. 

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Ready to apply for a DSCR loan?

Check your eligibility and get a quote.

Ready to apply for a DSCR loan? Here are the steps you need to take. 

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 

To get a DSCR loan, the first step is to find a good DSCR loan lender. HomeAbroad is an investor-centric platform that offers DSCR loans at competitive and customizable loan terms to maximize your returns. 

To get started, please click the button below and share some of your basic details. 

US Mortgages with no US credit history

Ready to apply for a DSCR loan?

Check your eligibility and get a quote.

Step 2: Meeting

Once you submit the details, our specialized mortgage officer will reach out to you to understand your requirements, answer any questions you may have, and hand-hold you through the loan process.

Step 3: Get preapproval 

A preapproval letter from the lender can demonstrate your seriousness to property sellers. For preapproval, we will examine your credit and cash reserves. You should meet the credit score requirement and have 3 month of cash reserves to get preapproval.

Step 4: Apply for the Loan 

After finding the right property and completing the due diligence, our mortgage officer will help you apply for the loan. Prepare the required documents beforehand for a smooth process.

Required Documents for DSCR Loans: 

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

Step 5: Underwriting 

Once you apply for a loan, our 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 6: Approval 

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

Step 7: Closing 

Once you have the DSCR loan approval, you can proceed with closing. Our loan officer will provide a closing disclosure, which contains your final loan terms, monthly mortgage payment schedule, and closing costs you are supposed to pay on closing day. 

Review it carefully and accept the terms to get the mortgage and complete the property ownership paperwork. 

Congratulations! You’ve done it. 

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. 

You are all set to get a DSCR loan, but before you apply, know the current DSCR loan interest rates.  

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 check the latest rates, visit our regularly updated DSCR loan interest rates page. Remember, the exact rate you’ll get 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.  

DSCR loans are not common, and not all lenders offer these. Let’s find out who provides DSCR loans. 

Who offers DSCR Loans? 

Private lenders offer DSCR loans. These loans are categorized as non-QM (non-qualified mortgages), which means DSCR loans don’t adhere to the lending guidelines of Government-Sponsored Enterprises like Fannie Mae and Freddie Mac. All non-QM loans are not regulated by the government, and lenders have the freedom to customize the loan products and their terms. 

This allowed private lenders to create this amazing and unique investor-friendly loan product called DSCR loan. However, the loan terms may vary from lender to lender due to the aforementioned reasons; each lender has the freedom to do so. 

This makes it really important to find the right lender for maximum benefits. HomeAbroad offers DSCR loans at competitive rates and customizable loan terms to facilitate optimum returns on your investment. 

US Mortgages with no US credit history

Ready to apply for a DSCR loan?

Check your eligibility and get a quote.

To sum up, DSCR loans are great option for real estate investors who can’t get a conventional loan. While DSCR loans may come at a higher cost compared to conventional options, they remain the only loan option for investors who don’t meet conventional mortgage criteria.

With right strategy, investors can get enough returns on your investment to offset the higher loan cost and even generate positive cash flow.

If you want a DSCR loan, the key to the most profitable financing is finding the right lender. HomeAbroad is an investor-centric platform, and we offer DSCR loans at competitive rates to native and foreign real estate investors in the US. Reach out to us to get a quote.

Frequently Asked Questions

  1. What is considered a good DSCR ratio? 

    Typically, a DSCR ratio of 1 or higher is considered good, indicating that the property’s income can cover all debt obligations. 

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

    Yes. While a DSCR ratio of 1 or higher is desirable, lenders also work with lower DSCR ratios, provided you pay a higher interest rate and down payment to compensate for the increased risk. 

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

    1. Single Family Residences (SFRs), which include Single Family Homes, Condos
    2. Townhomes  
    3. Multifamily Properties (1-4 units)  
    4. Multifamily Properties (5+ units)  
    5. Commercial properties 

  4. How can you increase the DSCR ratio? 

    You can increase your property’s income, extend loan repayment tenure, negotiate lower interest rates, or pay a higher down payment to increase the DSCR ratio. 

  5. Does a DSCR loan have a prepayment penalty? 

    Yes, DSCR loan lenders include prepayment penalties in loan terms to compensate for potential losses in case of early payment. 

  6. How many DSCR loans can you have? 

    As qualification depends on property itself, each DSCR loan is separate, allowing you to get multiple DSCR loans and expand your investment property portfolio significantly. 

  7. What is a no-ratio DSCR loan? 

    A no-ratio DSCR loan does not consider your property’s current income for DSCR calculation. Instead, this program assesses your overall financial profile, investment experience, and property’s future rental income to approve the loan. This is useful for rehab projects or BRRRR investment properties. 

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

    With HomeAbroad, you can borrow a minimum of $75K to a maximum of $5M through a DSCR loan. 

  9. Can you refinance with DSCR loans? 

    Yes, investors can refinance their loans with DSCR loans just as any other loan. We have explained the entire process in our DSCR loan refinance guide.

  10. Can foreign investors get a DSCR loan in the US?

    Yes, foreign real estate investors can get a DSCR loan in the US, even if they don’t have a US credit history. Refer to our foreign national mortgage guide to know more and qualify.