The Complete DSCR Loan Guide
DSCR (Debt Service Coverage Ratio) loans are the #1 loan type for rental property investors. This guide covers everything you need to know.
What is DSCR?
DSCR = Monthly Rental Income ÷ Monthly Debt Payment (PITIA)
Where PITIA = Principal + Interest + Taxes + Insurance + Association dues
Example Calculation
Monthly Rent: $3,500
Monthly PITIA: $2,800
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DSCR: 1.25
A DSCR of 1.25 means the property generates 25% more income than needed to cover the debt.
DSCR Tiers & What They Mean
| DSCR | Rating | What It Means | Rate Impact |
|---|---|---|---|
| 1.50+ | Excellent | Strong cash flow | Best rates |
| 1.25-1.49 | Good | Comfortable margin | Standard rates |
| 1.10-1.24 | Acceptable | Meets requirements | +0.25-0.50% |
| 1.00-1.09 | Minimum | Break-even | +0.50-0.75% |
| Below 1.00 | No Ratio | Property doesn't cover debt | Limited options |
Who Should Use DSCR Loans?
Perfect For:
- ✅ Self-employed investors
- ✅ Multiple LLC property owners
- ✅ Portfolio builders
- ✅ Full-time investors without W-2
- ✅ Anyone who wants asset-based qualification
Not Ideal For:
- ❌ Owner-occupied homes (use conventional)
- ❌ Properties that don't cash flow
- ❌ Very short-term holds (use bridge instead)
DSCR Loan Requirements
Property Requirements
| Requirement | Standard | Notes |
|---|---|---|
| Property Type | 1-4 units, condos, townhomes | Some lenders do 5+ |
| Condition | Rent-ready | No major repairs needed |
| Leased | Yes (or market rent) | Appraisal rent estimate OK |
| Location | Urban/suburban preferred | Rural may have restrictions |
Borrower Requirements
| Requirement | Typical Range |
|---|---|
| Credit Score | 620-680 minimum |
| Reserves | 6-12 months PITIA |
| Experience | Often not required |
| US Citizen | No - foreign nationals OK |
| Entity | LLC, Corp, Trust OK |
Financial Requirements
| Requirement | Typical Range |
|---|---|
| Down Payment | 20-25% minimum |
| Max LTV | 75-80% |
| Min DSCR | 1.0 (varies by lender) |
| Max Loan | $3M-$5M common |
DSCR vs. Conventional Loans
| Feature | DSCR Loan | Conventional |
|---|---|---|
| Income Verification | None | Full docs required |
| DTI Ratio | Not used | 43-50% max |
| Qualification Basis | Property cash flow | Borrower income |
| # Properties | Unlimited | Max 10 financed |
| Self-Employed | Easy | Complex verification |
| LLC Ownership | Yes | Usually no |
| Rate | Higher | Lower |
| Speed | 2-3 weeks | 4-6 weeks |
How to Maximize Your DSCR
1. Increase Rent
- Market your property well
- Consider furnished rentals (20-30% premium)
- Allow pets (extra monthly fee)
- Add amenities (washer/dryer, storage)
2. Decrease PITIA
- Shop insurance rates annually
- Challenge property tax assessments
- Buy down your rate with points
- Choose longer amortization (30 vs. 25 year)
3. Buy Right
- Target cash-flowing markets
- Use the 1% rule as a screening tool
- Factor in all expenses before buying
DSCR Loan Process
Step 1: Pre-Qualification (Day 1)
- Submit property details
- Provide credit authorization
- Get preliminary approval
Step 2: Application (Days 1-3)
- Complete full application
- Submit property lease
- Provide entity documents
Step 3: Appraisal (Days 5-10)
- Lender orders appraisal
- 1007 rent schedule included
- Value and rent confirmed
Step 4: Underwriting (Days 10-18)
- Final document review
- Title work completed
- Insurance bound
Step 5: Closing (Days 18-25)
- Final numbers confirmed
- Sign closing docs
- Funds disbursed
Common DSCR Loan Mistakes
Mistake 1: Not Checking Rent Estimate First
Fix: Get a rent estimate before making offers. The appraiser's number matters most.
Mistake 2: Forgetting HOA/Condo Fees
Fix: Include ALL monthly costs in your DSCR calculation.
Mistake 3: Over-Leveraging
Fix: Leave cushion. A 1.0 DSCR means one vacancy month = negative cash flow.
Mistake 4: Ignoring Prepayment Penalties
Fix: Know your exit timeline. 5-year prepay kills a flip strategy.
Mistake 5: Waiting Too Long on Rate Locks
Fix: Lock when you're ready. Rates can move quickly.
DSCR Calculator
Quick Formula
Step 1: Monthly Rent $________
Step 2: Annual Insurance ÷ 12 $________
Step 3: Annual Taxes ÷ 12 $________
Step 4: Monthly HOA $________
Step 5: Calculate Monthly P&I $________
(Loan amount × rate factor)
Step 6: Add Steps 2-5 = PITIA $________
Step 7: Divide Step 1 by Step 6 = DSCR ________
Rate Factor Table (30-year amortization)
| Rate | Factor per $100K |
|---|---|
| 7.0% | $665/month |
| 7.5% | $699/month |
| 8.0% | $734/month |
| 8.5% | $769/month |
| 9.0% | $805/month |
Example: $400K loan at 8% = $734 × 4 = $2,936/month P&I
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