DSCR loans explained: financing a rental on its rent

A DSCR loan is a business-purpose mortgage on a rental property that is underwritten on the property’s own rent instead of your personal income. The lender compares the monthly rent with the property’s full monthly payment: principal, interest, property taxes, insurance and any association dues. That comparison is the debt service coverage ratio, and it takes the place of your tax returns, pay stubs and debt-to-income ratio. Your credit, your housing payment record, the money for the down payment and reserves, and the appraisal are still checked.

If your tax returns understate what your rentals really earn, this is often the loan that makes the next purchase possible. Here is how it works.

How the ratio works

DSCR stands for debt service coverage ratio. Divide the rent by the full monthly payment and you get one number:

• Above one: the rent covers the payment with room to spare.
• At one: the rent just covers the payment.
• Below one: the rent falls short of the payment, and fewer programs fit.

The ratio, your credit, the loan size, the property and whether it is a purchase or a refinance together set how much you can borrow against the property’s value. The easiest way to see it is to run your own numbers in our DSCR calculator, which counts taxes, insurance and association dues the way a lender does.

Where the rent figure comes from

The appraiser reports the market rent for the property on a comparable rent schedule, a standard form that compares it with similar rentals nearby. Fannie Mae’s guide (opens in a new tab) calls for the same form to support rental income on its own loans. On a property that is already let, the lease is used too.

• The usual rule: the qualifying rent is generally the lower of the lease and the appraiser’s market rent.
• A higher lease: some programs count a lease above market rent when you can show the rent has actually been paid.
• Vacant property or a purchase: the appraiser’s market rent is used, and some programs lower how much you can borrow on a vacant property.
• Short-term rentals: programs count booking income differently from a lease. On a refinance they look at your booking history, and the property must be allowed to be let short-term where local rules require it.

What the lender still looks at

The rent replaces your income, not the rest of the file. Expect the lender to check:

• credit for each borrower or guarantor, and your recent mortgage or rent payments;
• assets for the down payment, closing costs and reserves;
• the appraisal, with its rent schedule;
• landlord experience, where the program asks for it.

Why it is a business-purpose loan

A DSCR loan is for investment property that nobody on the loan will live in, even part of the year. You sign a statement that the loan is for business purposes and that nobody on the loan will live in the property.

That label matters. The federal Truth in Lending rules exempt credit that is primarily for business purposes (opens in a new tab), and their official interpretation (opens in a new tab) treats credit to buy, improve or maintain a rental property the owner does not live in as business purpose. So these loans come with different paperwork from a home loan, and we take the occupancy statement seriously.

What a DSCR loan can finance

• Houses, townhouses and condos let to a tenant.
• Two to four units, with the rent of every unit counted.
• Larger buildings of five to ten units and small mixed-use buildings, valued more like small commercial property.
• Short-term rentals, with the rules above.
• A purchase, a refinance, or cash out of a rental you own; and replacing a fix and flip loan once the property is rented.

Fixed rates, interest-only periods and adjustable options exist in different programs.

The honest tradeoffs

• Prepayment penalties are common. Many DSCR loans have a prepayment penalty in the first years, where the law allows one, and options without one exist. Ask to see both before you choose.
• It is not a no-document loan. You still bring statements, credit and an appraisal.
• A conventional investment loan can be simpler. When your tax returns show the income cleanly, an investment property loan based on your income may fit with fewer conditions. A loan officer can compare both.

Frequently asked questions

Can I live in a property I buy with a DSCR loan?

No. A DSCR loan is for investment property only. Nobody on the loan may live in the property, even part of the year, and you sign a statement saying so.

Do you need my tax returns?

No. The property’s rent takes the place of your income. Your credit, your assets and the appraisal are still checked.

Can a company hold title?

Yes. Title can be in your own name or in a company such as a limited liability company, with the owners giving a personal guarantee. I explain what that means in the article on borrowing in an LLC.

Do I need landlord experience?

Many programs want some, and some accept a first-time investor on tighter terms. Tell your loan officer about the properties you own now.