A DSCR loan qualifies the property rather than the borrower. The question is not whether your income supports the payment — it is whether the rent does.
The calculation
DSCR = Gross monthly rent ÷ PITIA
Where PITIA is principal, interest, taxes, insurance and HOA/association dues.
A property renting for $2,600 with PITIA of $2,200 has a DSCR of 1.18 — the rent covers the debt service with 18% to spare.
Common tiers:
- 1.25+ — strong, best pricing
- 1.00–1.24 — acceptable at most lenders
- Below 1.00 — “negative coverage,” available at some lenders with larger down payment and higher rate
Why investors use it
- No personal DTI calculation. The constraint that stops most investors at four to ten properties simply does not apply.
- No tax returns or W-2s. Useful if your returns show heavy depreciation and paper losses.
- No cap on financed properties at most DSCR lenders, versus conventional limits.
- LLC vesting generally permitted, which conventional financing usually does not allow.
- Faster documentation — no employment verification chain.
Typical terms
- Down payment — 20–25% typical, more at lower DSCR
- Credit — 660–680 minimum at most lenders, better pricing above 720
- Rate — above conventional investment pricing, commonly by 0.75%–1.5%
- Reserves — often 3–6 months PITIA
- Prepayment penalty — common. Typically a step-down over 3–5 years. This is the single most important term to read.
How rent is determined
Not by what you hope to charge. The appraiser completes a Form 1007 rent schedule estimating market rent. Lenders generally use the lower of actual lease rent or the appraiser’s market rent.
If you have a lease above market, that is good for cash flow but the lender may still use the lower figure. If below market, the lease usually governs.
Short-term rental income is accepted by a subset of lenders, typically using 12 months of platform statements — but not universally, and pricing differs.
The prepayment penalty
Most DSCR loans carry one, and it is where people get caught. A 5/4/3/2/1 structure charges 5% of the balance if prepaid in year one, declining annually.
On a $300,000 loan, selling in year two costs $12,000 in penalty. If your strategy involves a sale or refinance inside five years, price this explicitly. Some lenders offer reduced or no penalty for a higher rate — often worth it for a shorter hold.
DSCR versus conventional investment financing
| DSCR | Conventional | |
|---|---|---|
| Qualifies on | Property rent | Your personal income |
| Property limit | Usually none | Commonly 10 financed |
| Rate | Higher | Lower |
| LLC vesting | Usually allowed | Usually not |
| Prepay penalty | Common | Rare |
| Documentation | Light | Full |
Conventional is cheaper when you qualify. DSCR is what you use when DTI, property count or entity structure rules it out — and the rate premium is the price of that flexibility.
Common questions
Most lenders want 1.0 or above, with best pricing at 1.25+. Some allow below 1.0 with compensating factors and a larger down payment.
Generally no. Credit, assets and reserves are verified, but personal debt-to-income is not calculated.
General information, not advice on your specific situation. Guidelines, limits and pricing change, and vary by lender, programme and state. Nothing here is a commitment to lend or an offer of credit. For tax or legal questions, consult a qualified professional.
Sree Basireddy · Mortgage Loan Officer, NMLS 2705737 · Loan Factory, Inc., NMLS 320841 · Equal Housing Opportunity