By Sagi GliksmanReal Estate Investing3 min read
What Is a DSCR Loan? Definition, Formula and Example
DSCR loans approve a rental on the rent it earns, not on your income. The formula, a worked example and who uses them.
Key takeaways
- A DSCR loan is a mortgage on a rental property that qualifies on the property's rent, not your personal income. No tax returns, W-2s or pay stubs.
- DSCR = monthly rent ÷ monthly PITIA (principal, interest, taxes, insurance and HOA dues).
- Best pricing at a DSCR of 0.8 or higher. Minimum 0.75 with a pricing adjustment.
- Up to 85% LTV for U.S. residents and 70% for foreign nationals*.
DSCR loan definition
DSCR stands for debt service coverage ratio. A DSCR loan is a business-purpose mortgage on investment property.
The lender compares the property's rent with its monthly payment. If the rent covers the payment, the loan works, whatever your personal income.
How DSCR is calculated
DSCR = monthly rent ÷ monthly PITIA. PITIA is principal, interest, property taxes, insurance and any HOA dues.
Above 1.0 the rent covers the payment with room to spare. Below 1.0 the owner adds money each month.
- Monthly rent: $2,400
- Monthly PITIA: $2,000
- DSCR: $2,400 ÷ $2,000 = 1.20
A 1.20 DSCR clears the 0.8 mark for the best pricing. Lenders go down to 0.75 with a pricing adjustment.
Worked example: a $300,000 rental
A U.S. resident buys a $300,000 rental with 15% down. The loan is $255,000.
At an illustrative 7.5% rate over 30 years, principal and interest come to $1,783 a month.
- Principal and interest: $1,783
- Property taxes: $300
- Insurance: $150
- Monthly PITIA: $2,233
- Rent for a 1.0 DSCR: $2,233
- Rent for the 0.8 best-pricing mark: $1,786
If the property rents for $2,400, the DSCR is 1.07. Run your own numbers in the DSCR calculator.
DSCR loan vs. a conventional mortgage
- Qualifies on the property's rent, not your income, tax returns or DTI
- No 10-property cap, the limit conventional loans set per borrower
- Closes in your name or an LLC
- Investment property only, never a home you live in
- Rates run higher than conventional, in exchange for less paperwork and no portfolio limit
Who uses DSCR loans
- Self-employed investors whose tax returns understate their income
- Investors growing past 10 financed properties
- Foreign nationals with no SSN or U.S. credit
- Airbnb and VRBO operators
- Investors refinancing out of a fix and flip or bridge loan
Types of DSCR loans
- Purchase: up to 85% LTV for U.S. residents
- Rate/term refinance: up to 80% LTV
- Cash-out refinance: up to 70% LTV
- Short-term rental: qualifies on booking income or a market report
- Condo and condotel, warrantable or not
- Fixed, ARM or interest-only
Rate, LTV and DSCR on your property, the same day. No hard credit pull.
See DSCR loan termsFrequently asked questions
What does DSCR stand for?
Debt service coverage ratio: the property's rent divided by its monthly payment (PITIA).
Is a DSCR loan a commercial loan?
It is a business-purpose loan on residential investment property. It is underwritten on the property's income, like a commercial loan, but secured by 1-4 unit homes, condos and small apartment buildings.
How much down payment does a DSCR loan need?
15% minimum for U.S. residents (85% LTV). 30% for foreign nationals.
Can a first-time investor get a DSCR loan?
Yes, with many lenders. Some lower the leverage for a first rental, for example 5% less LTV.
What is a good DSCR?
1.0 or higher means the rent covers the payment. Best pricing starts at 0.8, and lenders go down to 0.75 with a pricing adjustment. Apartment buildings of 5+ units often need 1.25.
Can I use a DSCR loan on a home I live in?
No. DSCR loans are for investment property only. A home you live in needs a consumer mortgage.
Do DSCR loans have prepayment penalties?
Usually. Options run from none to 5 years. A longer penalty buys a lower rate.
How long does a DSCR loan take to close?
About 30 days: appraisal, title and closing. The term sheet comes the same day.