What is a DSCR Loan?
A DSCR (Debt Service Coverage Ratio) loan is an investment property mortgage that qualifies borrowers based on the property's rental income rather than the borrower's personal income. No tax returns, W-2s, or employment verification required—making it ideal for real estate investors building portfolios.
How DSCR is Calculated
The Debt Service Coverage Ratio compares the property's monthly rental income to its monthly debt obligations (mortgage payment, taxes, insurance, HOA):
DSCR = Monthly Rental Income ÷ Monthly Debt Obligations
DSCR Examples
- DSCR of 1.25: Property generates $2,500/month rent, mortgage payment is $2,000/month. Excellent cash flow.
- DSCR of 1.0: Rent exactly covers the mortgage payment. Break-even property.
- DSCR of 0.85: Rent is $1,700/month, payment is $2,000/month. Negative cash flow but still financeable.
DSCR Requirements
Most lenders require a minimum DSCR of 1.0 (break-even), though some allow ratios as low as 0.75 with compensating factors like higher down payments or excellent credit.
Who Should Use DSCR Loans?
- Full-Time Investors: Building portfolios without using personal income
- Self-Employed Borrowers: Avoiding tax return scrutiny
- Foreign Nationals: Investing in US real estate
- High-Income W-2 Earners: Maxing out conventional loan limits (typically 10 financed properties)
- Retirees: Purchasing rental properties without employment income
Qualification Guidelines
- Credit Score: Minimum 640-660 (higher scores get better rates)
- Down Payment: 20-25% for single-family, 25-30% for 2-4 units
- Reserves: 6-12 months of mortgage payments per property
- Property Types: Single-family, 2-4 unit, condos, townhomes
- Loan Amounts: Typically $75,000 to $3 million+
How Rental Income is Determined
Option 1: Current Lease Agreement
If the property is already rented, lenders use the existing lease amount (minus any vacancy factor).
Option 2: Appraisal Rent Schedule
For vacant properties or new purchases, the appraiser provides a market rent estimate based on comparable rentals in the area. Lenders typically use 75% of the appraised rent to account for vacancy.
Option 3: 1007 Rent Schedule
A separate rent analysis form completed by the appraiser showing comparable rents and market conditions.
Interest Rates and Pricing
DSCR loan rates are typically 0.75-1.5% higher than conventional investment property rates. Pricing factors include:
- DSCR Ratio: Higher ratios (1.25+) get better pricing
- Credit Score: 740+ scores receive significant rate improvements
- Loan-to-Value: Lower LTV = better rates
- Property Type: Single-family homes get best pricing
- Loan Amount: Larger loans may have slightly higher rates
DSCR vs. Conventional Investment Loans
| Feature | DSCR Loan | Conventional |
|---|---|---|
| Income Verification | Not required | Tax returns, W-2s, paystubs |
| DTI Ratio | Not calculated | Typically 45% max |
| Property Limit | Unlimited | 10 financed properties |
| Down Payment | 20-25% | 15-25% |
| Interest Rate | Slightly higher | Lower |
Real-World DSCR Example
Property: Single-family rental in Phoenix, AZ
Purchase Price: $400,000
Down Payment: $100,000 (25%)
Loan Amount: $300,000
Market Rent: $2,400/month
Monthly Payment (PITI): $2,100
DSCR: $2,400 ÷ $2,100 = 1.14
Result: Approved with 1.14 DSCR, 720 credit score, 6.875% interest rate. Investor closes in 30 days without submitting a single tax return.
Common DSCR Loan Mistakes
- Underestimating Expenses: Remember to include taxes, insurance, HOA, and maintenance
- Insufficient Reserves: Lenders require 6-12 months per property owned
- Ignoring DSCR Thresholds: Know your lender's minimum DSCR requirements
- Choosing Wrong Property: Some property types (rural, unique) may not qualify
Portfolio Growth Strategy
DSCR loans enable unlimited portfolio expansion since they don't count against your personal debt-to-income ratio. Investors can:
- Purchase property #1 with DSCR loan (no income docs)
- Build equity and cash flow
- Purchase property #2 using same strategy
- Repeat indefinitely without hitting conventional loan limits
Get Your DSCR Loan Pre-Approval
Ready to scale your real estate portfolio without income verification? Contact NS Funding for a free DSCR loan consultation. We'll analyze your investment property and provide same-day pre-approval.