What Is a DSCR Loan and How Can You Use One for Real Estate Investing?
August 20, 2023
If you’re a real estate investor or business owner looking to finance an income-generating property, you may have heard of DSCR loans. These
types of loans
are growing in popularity especially for borrowers who don’t fit the mold of traditional lending, like entrepreneurs, business owners, self-employed individuals or investors with complex portfolios. But what exactly is a DSCR loan? And how do you use one to grow your real estate holdings or secure commercial property?
Let’s break it down in this article.
DSCR stands for Debt Service Coverage Ratio. A DSCR loan is a type of real estate loan that evaluates your eligibility based primarily on the income generated by the property you're financing—not your personal income, credit score, or tax returns.
This makes DSCR loans especially appealing for:
- Real estate investors with rental income
- Self-employed individuals with non-traditional income
- Buyers who want a more streamlined loan process
- Investors scaling portfolios with multiple properties
Understanding the Debt Service Coverage Ratio
The Debt Service Coverage Ratio is a simple formula lenders use to determine if the property brings in enough income to cover the loan’s debt payments.
DSCR = Net Operating Income (NOI) ÷ Total Debt Service (Loan Payments)
Example: If a property brings in $5,000 in net income each month, and your mortgage payment is $4,000, your DSCR would be:
$5,000 ÷ $4,000 = 1.25 DSCR
This means the property generates 25 percent more income than the amount needed to cover the loan—generally a very healthy ratio.
Minimum DSCR Requirements
Most DSCR lenders require a minimum ratio of 1.0 to 1.25, depending on the lender and risk level.
Here’s what those numbers mean:
- 1.0 means the property earns just enough to cover the loan
- 1.25 means the property earns 25 percent more than the debt obligation
- Below 1.0 usually requires a larger down payment or will be declined
Because DSCR loans are asset-based, they skip over some of the red tape tied to personal income verification, which is a huge benefit for investors with fluctuating income, write-offs, or multiple properties.
What Types of Properties Can You Use DSCR Loans For?
DSCR loans are typically used for income-generating properties, such as:
- Single-family rental homes
- Multifamily properties (2–8 units)
- Short-term rentals (Airbnb, VRBO, etc.)
- Mixed-use buildings
- Small commercial buildings
- Portfolios of rental properties
Important note: DSCR loans are not meant for owner-occupied homes. They’re strictly for investment or business purposes.
Recent DSCR Loan Success Story
Jasmine is a full-time Airbnb host and investor who owns three short-term rental properties in North Carolina. When she found a small multifamily building near a college campus, she jumped at the opportunity.
The problem? Jasmine writes off most of her business expenses and shows very little net income on her taxes. A traditional lender told her she didn’t qualify, even with excellent credit and six-figure cash reserves.
That’s when she found a lender who offered
DSCR loans
for short-term rental properties.
Because Jasmine could prove that the new property would bring in strong monthly rental income (based on local comps and a rental analysis), she qualified for a DSCR loan with:
- 20 percent down
- 7.25 percent interest
- 30-year fixed term
She closed in days with no tax returns, no employment verification, and no stress. Now, that building earns her passive income while continuing to grow in value.
How to Qualify for a DSCR Loan
Here’s what most DSCR lenders will look for:
- Minimum DSCR ratio (typically 1.0–1.25)
- Down payment (usually 20–25 percent)
- Property appraisal
- Rent roll or expected rental income
- Good credit score (620+ is common, though some allow lower)
Instead of bank statements and tax returns,
lenders
will look at:
- Lease agreements or rental projections
- Appraisal with market rent analysis
- Operating expense estimates
Pros and Cons of DSCR Loans
Pros:
- No personal income or employment verification
- Great for self-employed or tax-efficient investors
- Fast closing (often under 30 days)
- Flexible use across multiple property types
- Easier to scale a real estate portfolio
Cons:
- Higher interest rates than conventional loans
- Requires strong property cash flow
- Larger down payments required
- Not available for owner-occupied homes
DSCR Loan Tips for Real Estate Investors
- Run Your Numbers First
Make sure your property's rental income supports the monthly payment with room to spare. Aim for at least a 1.25 DSCR. - Work With an Experienced Lender
Not all lenders offer DSCR loans, and terms vary widely. Look for one that specializes in investment property lending. - Have Your Documents Ready
Even though DSCR loans are less paperwork-heavy, you’ll still need rent projections, a purchase contract, and basic financials. - Use DSCR Loans to Scale
Since DSCR loans don’t cap the number of properties you own, they’re perfect for investors growing a portfolio quickly.
If you’re a real estate investor looking for flexibility, speed, and a way around strict income documentation, a DSCR loan might be your best friend. These
loans
are designed with investors in mind—focusing on what matters most: whether the property can pay for itself.
Whether you’re buying your first rental property or adding your tenth unit to your portfolio, DSCR loans can help you grow without being held back by tax returns or red tape.
Ready to Invest Using a DSCR Loan? If you're considering a DSCR loan for your next income property, work with a lender who understands real estate investing. We specialize in DSCR financing and can help you close fast with no tax returns required.
If you have your cash flow projections ready,
contact us today for a free consultation to see if you can take advantage of a
DSCR loan.
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