DSCR Loan
An investment property mortgage that qualifies borrowers based on the property's Debt Service Coverage Ratio rather than personal income.
Definition
DSCR loans are the most important loan product to enter the rental investor market in the last decade. A traditional conventional mortgage requires you to prove personal income with W2s, tax returns, and employment verification. A DSCR loan skips all of that and qualifies you based on whether the property's rental income covers the mortgage payment. The lender calculates a Debt Service Coverage Ratio (property income divided by total debt service) and typically requires a DSCR of 1.00 to 1.25 or higher to approve the loan. Many DSCR lenders allow LLC ownership, which makes these loans ideal for investors scaling under entity structures. They also skip the conventional mortgage cap of 10 financed properties, which is the other major reason investors switch to DSCR once they scale past 5 to 8 properties. The tradeoff is higher interest rates (typically 1 to 2% higher than conventional) and stricter LTV limits (usually capped at 75 to 80%). For BRRRR investors, DSCR loans are also the primary refinance tool because they allow faster seasoning periods than conventional loans.
Formula
Example
Property NOI is $18,000. Proposed annual debt service is $14,400. DSCR = 18,000 / 14,400 = 1.25. Passes most DSCR loan underwriting with room to spare.
Frequently asked
Do DSCR loans require personal income verification?
No. The loan qualifies based on the property's ability to cover debt service, not the borrower's personal income.
What DSCR ratio do lenders require?
1.00 is the floor at most lenders. 1.25 or higher gets better pricing. Below 1.00 usually requires compensating factors like larger down payments.
Are DSCR loan rates higher than conventional?
Yes, typically 1 to 2 percentage points higher than conventional investment property rates. The tradeoff is no personal income documentation and unlimited property count.
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