DSCR Loan

30- year fixed DSCR Loan for stabilized rental properties

Interest Rate

from 7.5%

Origination fee

3%

Loan To Purchase Price

up to 80%

Loan To Value

up to 80%

Minimum DSCR

None

Term

30-yr fixed rate

Minimum Loan Amount

$100,000

Maximum Loan Amount

$2,000,000

Minimum FICO

680

Type of Property

Residential 1-4 units

Table of Contents

What Is DSCR In Real Estate?

In real estate, DSCR refers to Debt Service Coverage Ratio. This is the ratio of the net operating income (NOI), in relation to the debt and expenses of a property. This ratio is used to measure the financial performance of the property, as it indicates how much of the debt (mortgage or loan) can be covered by the net cash flow.

What is Debt Service?

In real estate, ‘debt service’ refers to the debt obligations that are due on the property over a particular period. This refers to the principal mortgage or loan payment, interest on the loan and anything else that is required to cover the debt owed on the property.  

‘Servicing a debt’ means to make the necessary payments to cover what is owed, both the principal loan amount and the interest. Lenders are typically looking at a real estate investor’s ability to adequately service their debt, before approving them for a loan.

Debt Service Coverage Ratio

The DSCR is used by both investors and lenders, to work out the financial performance of a property. This will give both parties a good indication as to whether the property will generate enough income to cover the loan payments, once the operating expenses have been taken care of. It is also used by lenders to determine the maximum amount that they will provide on a loan to a real estate investor.

A good rule of thumb to use is, the larger the DSCR, the more likely the net operating income is to cover the debt and this means a lower risk for lenders. While this ratio may rise and fall each year, knowing how to calculate this is important for real estate investors who can then adjust their investment strategies accordingly.

DSCR formula

Debt Service Coverage Ratio = Net Operating Income / Debt Service

If a rental property has a loan repayment of $5000 annually and the property is generating an annual net operating income of $6,700 (including rental income), then the DSCR would be:


  • Debt Service Coverage Ratio = $6,700 / $5,000
  • Debt Service Coverage Ratio = 1.34

Any DSCR over 1 means that there is more than enough NOI to cover the debt that the property will incur. Lenders typically prefer a debt service coverage ratio of 1.2 or more, because this means that the borrower will be able to cover 100% of their debt, and still have money left over. In the case above, the rental income will need to be high enough to cover the operating expenses and the debt. So, it’s important for investors to make sure the rental income is reasonable enough to attract tenants, but high enough to cover everything.

What is a DSCR Loan?

A DSCR loan is a lending option geared towards real estate investors who would like to borrow funds based on an investment property’s cash flow, instead of their personal finances.

This means that proof of income, tax returns, employment information and so on, are not needed to qualify for DSCR loans for investment properties. Instead, investors will need to show the cash flow of an investment property as the main DSCR loan qualification.

For a DSCR loan, the DSCR calculation is vital, as this will clearly outline the investment property’s cash flow and show the likelihood of the debt being covered.

DSCR Loan Explained

DSCR loans can be used for various investment property types. These include single family (1-4 unit) residential investment properties, multi-family investment properties, mixed-use residential investment properties and short-term or vacation rental properties.

DSCR loans are underwritten based on a property’s income instead of the investor’s personal income. This means that the property’s cash flow is one of the most important factors in DSCR loan applications.

DSCR loans are quite different from conventional loans, and the fact that they are based on the property’s cash flow means that they offer certain benefits to investors. These include:

  • DSCR loans are easier to qualify for because they eliminate the Debt-to-Income (DTI) ratio and focus on the debt service coverage ratio (DSCR).
  • LLC and corporations can be issued DSCR loans, which is useful for many investors who have formed business entities and allows them to protect their personal assets.
  • Most DSCR loans are issued on a case-by-case basis, taking into account each unique situation. Which means that real estate investors can often take out more investment properties using DSCR loans than they could with conventional loans.
  • There is less paperwork required for DSCR loans as tax returns, proof of income, bank statements and other documents pertaining to personal finance aren’t needed. This saves time and energy for real estate investors and speeds up the entire DSCR loan process.

A good DSCR ratio for those who are applying for a DSCR loan is generally anything over 1.25, and a great ratio would be anything over 1.5. Anything under 1 is risky for real estate investors as this ratio means that the investor will be using 100% of the NOI to cover the debt.

With no cushion, this doesn’t bode well for months where the investment property may not receive the same income, or there are unforeseen circumstances. Lenders want to decrease their risk as much as possible on a DSCR loan, so making sure that the investment property’s income (particularly the rental income) covers more than the required debt payments is vital.

Most DSCR loans are available through private lenders. To qualify for a DSCR loan, each lender will have different requirements which will include a minimum credit score, a minimum down payment, a DSCR of over 1.2, a positive cash flow, and a minimum property value. Bear in mind that the down payment is often between 20% and 25% on DSCR loans.  

DSCR Meaning

Debt Service Coverage Ratio (DSCR) is a number that illustrates whether the net operating income of an asset will cover the necessary debt payments over a certain period. This number is calculated by dividing the NOI by the debt service amount.

The ratio gives real estate investors and lenders an indication as to whether an investment property’s income will cover the debt and whether there will be any funds leftover, when applying for a DSCR loan. It is a useful tool to work out how much debt an investor can take on, while maintaining a positive cash flow. In the case of rental properties, this gives investors a good indication as to whether the rental income will cover the debt and expenses or not.

Additional Resources

DSCR Loan Calculator

This DSCR Calculator makes it easy to workout DSCR Ratio, and it also estimate maximum loan amount and monthly repayments.

DSCR Loan Interest Rates

Find out the latest DSCR Loan Interest Rates here. This guide explores what rate you are likely to qualify for.

DSCR Loan Requirements

First and foremost there must be a rental property to evaluate, but there are other DSCR Loan Requirements.

DSCR Loan Pros & Cons

There are advantages and disadvantages associated with DSCR Loans. This guide outlines all the DSCR Loan Pros & Cons.

Best DSCR Lenders

Simply put, some lenders are better than others. This guide reviews the Best DSCR Lenders at this moment in time.