DSCR Loans (Debt Service Coverage Ratio Loans)

A Debt Service Coverage Ratio Loan (more commonly referred to as a DSCR Loan) is designed to allow real estate investors to purchase investment properties  based on rental income rater than primarily focusing on the buyers information.  These type of properties include:

Single Family Houses

2 to 4 units properties

5 units and up (Multi-Family)

Short-Term Rentals (Air-BnB, VRBO)

Mixed Used Properties

Key Take-A-Aways about DSCR Loans:

• No Personal Income Required: DSCR loans qualify borrowers based on the property’s rental income — not tax returns, pay stubs, or personal income.

• Investment Property Focused: These loans are designed specifically for real estate investors purchasing or refinancing income-generating properties.

• Simple Qualification Formula: Lenders calculate the Debt Service Coverage Ratio by dividing the property’s monthly rental income by the monthly loan payment.

• Flexible Underwriting Standards: DSCR loans often offer looser documentation requirements compared to conventional loans, making them ideal for investors with complex finances.

How to Calculate DSCR — A Simple Guide for Real Estate Investors

If you’re looking into DSCR loans, understanding how to calculate the Debt Service Coverage Ratio (DSCR) is key. The good news? It’s a straightforward formula that shows lenders whether your investment property earns enough income to cover the loan payments.

DSCR Formula:

DSCR = Monthly Rental Income ÷ Monthly Loan Payment

• Monthly Rental Income — The total rent your investment property brings in every month.

• Monthly Loan Payment — The full monthly payment on your mortgage (including principal, interest, taxes, and insurance if required).

DSCR Loan Example:

• Your rental property earns $2,500 per month.

• Your monthly mortgage payment is $2,000.

DSCR = $2,500 ÷ $2,000 = 1.25

What Does a DSCR of 1.25 Mean?

A DSCR of 1.25 means your rental income is 25% higher than your loan payment. Lenders typically require a minimum DSCR of 1.0, which means the property earns enough to cover the loan. Higher ratios make it easier to qualify for a DSCR loan.

Why DSCR Loans Matter for Real Estate Investors

• No personal income verification required

• Easier loan approval based on property cash flow

• Perfect for rental property purchases and refinances

Tip for Investors:

The higher your DSCR, the better your chances of getting approved with competitive terms.

What DSCR Does Not Take Into Account

While the Debt Service Coverage Ratio (DSCR) measures a property’s gross rental income against its total annual mortgage obligations — including principal, interest, taxes, insurance, and HOA fees — there are certain expenses lenders typically exclude from the DSCR calculation.

These excluded costs include:

• Property management fees

• Maintenance and repairs

• Utility expenses

• Vacancy rates or rental losses

• Miscellaneous upkeep costs

Lenders focus mainly on whether the property’s income can cover the loan payments, not the day-to-day operational expenses.

How to Calculate DSCR

To calculate your debt service coverage ratio, follow the steps below: 

Step 1

To find your gross rental income, we take your annual rental income based on your lease agreement and the appraiser’s comparable rent schedule (form 1007) and use the lesser of the two. In some cases, if you can prove a twelve-month history of LTR or STR rental income, you can qualify off that rather than the appraiser’s market rent.

Step 2

Next, you’ll need to find your annual debt. Your annual debt for loan qualification purposes equals the total annual principal, interest, taxes, insurance, and HOA (if applicable) payments. Annual Debt = Total Annual PITI payments.

Step 3

Next, you’ll divide your annual gross rental income by your annual debt for your ratio. DSCR = Annual gross rental income/Annual debt.

Please note that net operating income (NOI), capitalization rate (Cap Rate), cash on cash return (COCR), and return on investment (ROI) are not considered for DSCR mortgage loan qualifying purposes.

Example of Debt Service Coverage Ratio Calculation

A real estate investor might be looking at a property with a gross rental income of $50,000 and an annual debt of $40,000. When you divide $50,000 by $40,000, you get a DSCR of 1.25, which means that the property generates 25% more income than what is necessary to repay the loan. This also means that there is a positive cash flow in the lender’s eye.

Common Questions for DSCR Loan Approval

• What is the monthly rental income of the property?
  

• What is the total monthly mortgage payment, including taxes, insurance, and HOA (if applicable)?
  

• What is the Debt Service Coverage Ratio (DSCR) for this property?
  

• Is the property currently leased or tenant-occupied?
  

• Does the property generate enough cash flow to meet minimum DSCR requirements?
  

• What is the property type — single-family, multi-family, or commercial?
  

• What is the loan amount requested?
  

• Is this a purchase, refinance, or cash-out refinance?
  

• What is the down payment or loan-to-value (LTV) ratio?
  

• Does the borrower have prior experience with investment properties?
  

DSCR Loan Pre-Qualification Checklist

Things to Watch Out for with DSCR Loans — Common DSCR Loan Cons

Before applying for a DSCR loan, it’s important to know the potential drawbacks. Here are key questions and factors every real estate investor should consider: