DSCR Loans: What It Is & How to Apply in [2024]

Key Takeaways:

➡️ DSCR loans focus on property’s income, not personal income, making them ideal for investors with non-traditional income sources or high DTI (Debt to Income) ratios if they already own investment properties. 

➡️ DSCR (Debt Service Coverage Ratio) is the ratio of gross rental income to PITIA (Principal, Interest, Taxes, Insurance, HOA).

➡️ Generally, to qualify for a DSCR loan, the property should make enough income to pay for its debt service, i.e. PITIA. 

➡️ Foreign investors can qualify for a DSCR loan without needing a US credit history.

Are you a US or foreign real estate investor struggling to qualify for a traditional mortgage in the US?

You’re not alone.

Many investors face hurdles because their income sources or US credit history don’t meet standard lending criteria. 

But fear not! There’s a solution: DSCR loans. These loans are tailor-made to overcome the limitations of traditional financing. 

Follow this detailed guide to understand how DSCR loans can be your ticket to securing a hassle-free investment property mortgage in the US.

What is a DSCR Loan? 

A Debt Service Coverage Ratio (DSCR) loan is a mortgage program designed for both US and foreign real estate investors who can’t qualify for traditional mortgages. 

Unlike traditional loans, which heavily weigh the borrower’s personal income and liabilities, DSCR loans focus on the revenue generated by the investment property itself.  

This loan assesses a borrower’s ability to repay based on the property’s gross rental income to its mortgage payments. 

This unique qualification method makes them an excellent option for investors looking to build a portfolio of investment properties or needing more flexibility with less documentation.   

Still not sure how DSCR loans work? Here you go. 

How does a DSCR Loan Work? 

DSCR loans provide a perfect mortgage solution for investors who can’t qualify for conventional mortgages. Traditional mortgages have strict requirements like standard income documents (paystubs, W2s, and tax returns), which may not be feasible for all real estate investors.

Additionally, conventional mortgages require a low Debt-to-Income (DTI) ratio, which can be challenging for investors with multiple investment property loans. 

For foreign investors with no US credit history, conventional mortgages also have strict credit score requirements, making it impossible for them to invest in the US.

DSCR loans solve these problems by allowing investors to qualify based on the property’s income rather than their personal income. This means there’s no need for paystubs, W2s, or worrying about your DTI ratio.

The entire qualification depends on whether the property can cover its PITIA (Principal, Interest, Taxes, Insurance, and HOA if applicable). 

At HomeAbroad, we also offer DSCR loan options for DSCR ratio between 0.75-1 and in some situations, a “No DSCR” ratio loan. However, your loan terms might be relatively worse for DSCR < 1.  

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

In addition, for foreign investors looking to invest in US real estate, a DSCR loan could be a great option because the property’s income could be used to qualify for the mortgage loan v/s foreign income.

HomeAbroad offers DSCR mortgage loan programs to foreign investors without needing a US credit history.

DSCR loans offer a flexible and accessible financing option for real estate investors, making it easier to expand your portfolio and invest confidently without the constraints of conventional mortgage requirements.

Now that you understand how DSCR loans work let’s understand the role of the DSCR metric—what it is exactly and how it’s calculated.

How to Calculate Debt Service Coverage Ratio

The Debt Service Coverage Ratio (DSCR) is a crucial metric for assessing a property’s financial health. It is calculated by dividing the property’s gross rental income by its  PITIA (Principal, Interest, Tax, Insurance, and HOA). 

Let’s walk through a real-life example to understand DSCR calculation.

A real estate investor, John Hawkins, owns a rental property in downtown Miami. Here are the financial details of the property:

Monthly Rental Income: $8,333.33  
Monthly PITIA:  
Monthly Principal + Interest = $4,166.67  
Monthly Property Taxes = $833.33  
Monthly Property Insurance = $333.33  
Monthly HOA Fees = $1,333.33  

Total Monthly PITIA: $4,166.67 + $833.33 + $333.33 + $1,333.33 = $6,666.67 

Calculate DSCR: 

DSCR = Gross Rental Income ÷ PITIA   
 
DSCR = 8,333.33 ÷ 6,666.67 
 
DSCR = 1.25 

Generally, a DSCR of 1 or higher is required to qualify for a loan, but at HomeAbroad, we offer DSCR loans starting from a DSCR of 0.75, one of the most competitive in the market. This flexibility allows more investors to qualify and benefit from DSCR loans.

Want to calculate your property’s DSCR? Use our DSCR calculator to do it.

With the basics clear, let’s now weigh the pros and cons to ensure this is the right loan option for you.

DSCR Loan Pros & Cons 

DSCR loans offer several advantages and a few drawbacks for real estate investors, providing a unique and flexible financing option. Here are the pros and cons:

Pros	Cons
No personal income verification	Higher down payment
Flexible qualification compared to conventional mortgages	Potentially higher interest rates
Faster application and approval process	Only finance investment properties
Access to higher loan amounts based on property income
Flexible repayment terms tailored to property cash flow
Finance multiple investment properties at once
Cash-out refinance available to cash your equity
No US credit needed for foreign investors

Pros:

1. No personal income verification: Borrowers are not required to provide individual income documentation like paystubs, W2s, and tax returns, making it easier for investors with non-traditional or foreign income to qualify. 

2. Flexible qualification compared to conventional mortgages: DSCR loans focus on the income generated by the property rather than the borrower’s income, allowing more investors to qualify. 

3. Faster application and approval process: With less paperwork and a streamlined process, DSCR loans can be approved more quickly than traditional loans. 

4. Finance multiple investment properties at once: Investors can obtain multiple DSCR loans simultaneously because each DSCR loan is standalone and depends solely on the income of the individual property.  

5. Flexible repayment terms tailored to property cash flow: Repayment schedules can be customized to align with the property’s cash flow, making it easier for investors to manage payments. 

6. Cash-out refinance: Investors can leverage the equity in their properties to access additional funds to put a downpayment on another investment property, a perfect tool to build a portfolio of investment properties. 

7. Guaranteed Investment Return: Qualification depends on the property’s income, which means mortgage experts thoroughly assess your property to ensure it can repay the loan. This thorough analysis guarantees that you’re investing in a property with true profit potential, giving you peace of mind. 

8. No US Credit Needed for Foreign Investors: Since the qualification depends on the property and the loan is secured by the property, foreign investors can qualify for the DSCR loan mortgage even without a US credit history. 

Cons:

1. Higher down payment: DSCR loans typically require a down payment of 20%-25%. 

2. Potentially higher interest rates: Interest rates for DSCR loans may be slightly higher than a conventional mortgage due to the increased risk to lenders. HomeAbroad Loans the most competitive DSCR loan interest rates to our customers. 

3. Only for investment properties: These loans are exclusively available for investment properties, not primary residences or second homes. 

By understanding these pros and cons, real estate investors can decide whether DSCR loans are the right financing option for their investment strategies.

At HomeAbroad, we understand that weighing the pros and the cons can be difficult. We are here to guide you through the DSCR loan process to achieve your real estate goals.

Check out what our Mortgage Loan Officer, Steven Glick, has to say about DSCR Loans:

Not sure if this is the right option for you? Let me clear that up for you.

Who are DSCR Loans for?

DSCR loans are ideal for real estate investors with non-traditional income sources or high DTI ratios from existing loans.  

These loans offer a solution for those who may struggle to qualify for traditional mortgages due to their unique situations as real estate investors.

Foreign investors without a US credit history can also be eligible for DSCR loans, allowing them to expand their investment portfolios in the US market. 

Let’s hear from Jay Thomas, a seasoned real estate agent, on the suitability of DSCR loans for investors. 

All set to apply?  Let’s understand the qualification criteria for securing a DSCR loan. 

How do You Qualify for a DSCR Loan? 

 Here’s a detailed look at what you need to qualify for a DSCR loan: 

DSCR Loan Requirements for Long-Term Rental Properties

Qualifying for a DSCR Loan for lone-term rental properties primarily focuses on the income generated by the property itself. The key requirements for HomeAbroad’s DSCR loan program include: 

• Minimum credit score of 620 for US-based Investors. No US credit is needed for foreign investors. 

• DSCR ratio of 0.75 or higher 

• A minimum down payment of 20%; foreign investors would need 25% down payment for DSCR loan 

• Rental Income Appraisal (Form 1007) through an accredited Appraisal Management Company or Documented record of rental income for at least 12 months 

• Cash Reserves: 3 Months PITIA for US investors and 6 Months PITIA for foreign investors. Reserved don’t have to be liquid assets.  

DSCR Loan Requirements for Short-Term Rental Properties 

DSCR loan for short-term rental properties assess the ability to generate consistent income despite the changes in occupancy rates. The key requirements for HomeAbroad’s STR loan program include: 

• A minimum credit score of 620 for US-based Investors. No US credit is needed for foreign investors.  

• DSCR ratio of 0.75 or higher 

• A minimum down payment of 20%; foreign investors would need 25% down payment for DSCR loan 

• Documented rental income history from sources like Airbnb or VRBO for 12 months 

• Cash Reserves: 3 months of PITIA (US Investors) and 6 months of PITIA (Foreign Investors) 

• Vacancy rate less than 50% 

With the qualification criteria in mind, let’s walk through a step-by-step guide on how to apply for a DSCR loan. 

Step-by-Step Guide to Applying for a DSCR Loan 

1. Get Started with HomeAbroad:

Choosing the right DSCR loan lender is crucial.

HomeAbroad specializes in DSCR loans, and we offer customized loan terms to maximize your investment returns. 

With our proven track record of working with investors and our expertise in DSCR loans, we are committed to helping you achieve your real estate investment goals. Begin your DSCR loan journey with us. 

Not sure about us? Mason can vouch for us:

When I first heard about DSCR loans, I was skeptical. But after speaking with a HomeAbroad loan officer, I understood everything. I applied for the loan with HomeAbroad, and it was the best experience ever. Just go for HomeAbroad—the best service ever.

Mason Gallagher - US Investor - Purchased a rental property in Miami, FL.

2. Meet with Our Mortgage Officers:

After you submit your details, our dedicated mortgage officer will promptly reach out to you and guide you through every step of the process.

At HomeAbroad, we prioritize your investment success and are dedicated to providing personalized support tailored to your needs. 

3. Get Preapproval:

Submit basic financial information to get preapproved for a DSCR loan, giving you an idea of how much you can borrow based on your available assets for a downpayment, reserves, and expected closing costs.  

4. Gather Your Documents and Fill Out an Application:

Collect necessary documents, including rental agreements, financial statements, and property details, and complete the loan application. 

Required Documents for DSCR Loans:  

• Property’s purchase contract 

• 2 Months‘ Bank Statements   

• Appraisal  

• 1007 Rent Schedule  

• Homeowners Insurance  

• Entity Documentation (If buying under LLC) 

5. Underwriting:

To make the final decision, the underwriter will thoroughly evaluate your application and supporting documents according to the lending guidelines. 

6. Approval:

The underwriter will either approve, decline, or accept your loan application with conditions. 

7. Closing:

After approval, our loan officer will provide a closing disclosure containing your final loan terms, monthly mortgage payment schedule, and closing costs you are supposed to pay on closing day. Accept it and complete the necessary paperwork to get the funds and take property ownership. 

By following these steps and meeting the outlined criteria, you can qualify for a DSCR loan and leverage its benefits to grow your real estate investment portfolio. 

Secure a DSCR Loan with HomeAbroad 

Choosing the right lender can make or break your investment success, as their expertise and terms can significantly impact your profitability and financial stability. 

At HomeAbroad, we understand the unique journey of real estate investors. Understanding traditional lending can be challenging, primarily when you are focused on growing your portfolio.

That’s why we offer customized DSCR loans designed to meet your needs and maximize your investment potential. With HomeAbroad, you get a trusted partner committed to your long-term success.  

Let us help you unlock the full potential of your investments. 

Frequently Asked Questions