Skip to content

    Try “cap rate”, “seasoning”, “LTV” or “Airbnb income”.

    DSCR loans

    The investor loan sized on the property's rent instead of your income: how it works, what it asks, what it costs.

    A DSCR loan is how most rental investors finance once they outgrow, or never fit, a conventional mortgage. The lender looks at what the property earns against what it costs to own, not at your tax returns.

    These guides start with the ratio itself and how lenders calculate it, then cover what you need to qualify, what drives the rate and the prepayment penalty, and how the loan works for short-term rentals and cash-out refinances.

    The basics

    1. What is a DSCR loan?

      A DSCR loan is sized on what the property earns. Here is how lenders read that ratio, what they ask for, what it costs, and when it beats a conventional loan.

      Beginner11 min read
    2. How to calculate DSCR

      DSCR is rent divided by the full payment. The hard part is knowing which rent and which payment a lender will use. Here is the method, with every number worked.

      Beginner10 min read

    Qualifying

    1. DSCR loan requirements

      Every lender draws its own lines, but the shape is the same everywhere. Here is what is commonly required, what moves each line, and how to check a deal against them.

      Beginner10 min read

    What it costs

    1. DSCR loan rates

      A DSCR rate is a base price plus a stack of adjustments for your file. Know the stack and you can see which levers are worth pulling, and what each one costs.

      Intermediate9 min read
    2. DSCR prepayment penalties

      Almost every DSCR loan trades a lower rate for a fee if you pay it off early. Here is how the common structures work, what they cost, and how to match one to your exit.

      Intermediate10 min read

    Uses

    1. DSCR loans for short-term rentals

      A DSCR loan can qualify a vacation rental on what it books, not what you earn. The catch is in how the lender counts that income. Here is each method, with the numbers.

      Intermediate10 min read
    2. DSCR cash-out refinance

      A DSCR cash-out turns a rental's equity into cash on the strength of its rent. Here is how much you can take, how long you must own it first, and what it costs.

      Intermediate11 min read

    Key terms

    DSCR
    Debt service coverage ratio. The property's monthly rent divided by its full payment (PITIA). Investor lenders use it instead of the borrower's income: 1.00 means the rent exactly covers the payment, 1.25 means a quarter to spare.
    DSCR vs DTI
    DTI asks whether the borrower can afford the debt: monthly debts divided by gross income. DSCR asks whether the property can: rent divided by PITIA. Home loans live on DTI; a DSCR loan needs no pay stubs or tax returns.
    Business-purpose loan
    Credit for a business or investment, such as a rental the owner will not live in. It falls outside most consumer mortgage rules (TRID, rescission, ability-to-repay), which is why DSCR and bridge lenders send a term sheet instead of a Loan Estimate.
    Vesting: personally or in an entity
    Whose name goes on the title and the loan. DSCR loans close in a person's name or in an LLC or corporation; an entity brings its articles, operating agreement, EIN letter and a certificate of good standing, and its owners sign a personal guarantee. An LLC adds liability separation, not a better rate.
    Prepayment penalty (PPP)
    A fee for paying the loan off early, by sale or refinance, usually within the first 1 to 5 years. It protects whoever bought the loan, and the borrower gets a lower rate for accepting it. Standard on DSCR loans; home loans on a primary residence mostly cannot have one.
    Prepayment penalty structures
    Step-down: the fee falls each year, written as the percent per year (5-4-3-2-1, 3-2-1). Flat: the same percent throughout (3% or 5%). Months of interest: for example six months' interest on whatever is prepaid above 20% of the balance. Yield maintenance: the lender's lost interest, mostly on portfolio loans.
    DSCR refinance: rate-term vs cash-out
    A rate-term refinance pays off the old loan and costs to change the rate or term; little or no cash comes out, and higher LTVs are allowed. A cash-out refinance takes equity out as cash: a lower maximum LTV (usually 70 to 75%), a higher price and seasoning rules. Both are sized on the property's DSCR.
    Seasoning
    How long something has existed before the lender will rely on it. Title seasoning: time owned before a cash-out refinance can use the new appraised value (6 months is common on DSCR; before that, value is capped at cost plus documented work). Also funds seasoning, and time since a credit event.
    What unlocks a higher LTV
    DSCR leverage comes in tiers on the lender's matrix: credit score (often 700 or 740 for the top tier), DSCR (1.00 vs 1.25), experience, loan size, property type and purpose. Moving up one box is how 75% becomes 80%. Big reserves or documented income can help a file on the edge.
    Underwriting
    The lender's review of risk before it approves: the borrower (credit, assets, income or DSCR), the property (appraisal, title, insurance) and the deal (LTV, purpose). The underwriter issues conditions, and the loan is approved when they are cleared.

    Study these as flashcardsOpen the glossary