What is a DSCR Loan?

If you’re a real estate investor looking to expand your portfolio or purchase your next rental property, you’ve likely encountered the term “DSCR loan.” But what is a DSCR loan, and why is it such a valuable tool for property investors? A Debt-Service Coverage Ratio (DSCR) loan is a specialized financing option designed specifically for real estate investments.

Unlike traditional mortgages, which require proof of personal income, DSCR loans are a type of non-qualified mortgage that focuses on the cash flow generated by an existing rental property. This makes them ideal for investors who want to qualify based on rental income rather than their own pay stubs or tax returns.

Continue reading to learn how DSCR loans work, their benefits, and the process for getting one. Whether you are a novice or a seasoned investor, learning about DSCR loans can open new doors to real estate investment opportunities.

How Does the DSCR Threshold Work?

At the heart of DSCR loans is the Debt-Service Coverage Ratio (DSCR)—a key metric lenders use to assess whether a property generates enough income to cover its loan payments. Here’s how it works:

The formula: DSCR = Net Operating Income / Debt Service

Net Operating Income (NOI): The NOI is the property’s total annual rental income minus expenses like maintenance, taxes, and insurance.

Debt Service: The total annual loan payments, including principal and interest.

For example, if your rental property generates $60,000 in NOI and your annual loan payments are $50,000, your DSCR Threshold calculation would be: DSCR = 60,000 / 50,000 = 1.2

A DSCR of 1.2 means the property generates 20% more income than needed to cover the loan payments. Lenders typically look for a ratio above 1, but requirements can vary.

Benefits of DSCR Loans

DSCR loans offer several unique advantages that make them a preferred choice for real estate investors:

• No Personal Income Verification – Instead of focusing on your personal income, the lender evaluates the property’s cash flow. This makes DSCR loans an excellent option for self-employed individuals or those with complex finances.
• Streamlined Process – With less emphasis on personal financial documentation, the application process can be quicker and simpler.
• Flexible Use—DSCR loans can be used to purchase new rental properties or refinance the equity you have built through a cash-out refinance.
• Scalability – For investors building a real estate portfolio, DSCR loans allow for multiple property acquisitions without being limited by personal debt-to-income (DTI) ratios.
• Focus on Property Cash Flow – If your property generates consistent rental income, a DSCR loan can make it easier to qualify and scale your investments.

DSCR Loan Eligibility Guidelines

Qualifying for a DSCR loan is different from qualifying for a traditional mortgage. Here’s what lenders typically look for:

• DSCR Threshold: Most lenders require a minimum DSCR of 1, meaning the property’s income after expenses must at least match its loan payment amount.
• Credit Score: A good credit score is still important; many lenders prefer scores of 680 or higher.
• Down Payment: Expect to provide a down payment of at least 20-25% of the property’s purchase price.
• Property Type: DSCR loans are designed for investment properties, not primary residences.
• Reserves: Lenders may ask for reserves (e.g., several months of loan payments) to demonstrate financial stability.

How to Get a DSCR Loan

The process to get a DSCR loan is simpler than you might think. Here’s a step-by-step guide:

1. Analyze the Property’s Cash Flow – Calculate your property’s potential NOI and DSCR. You want the property’s DSCR score to indicate that your property will generate more money than you will owe.
2. Prepare Your Financials – Gather documentation for the property, such as lease agreements, operating expense records, and a recent appraisal, if applicable.
3. Work with an Experienced Lender – DSCR loans require specialized knowledge. Not all lenders offer non-qualified mortgages, so it is important to find the right partner.
4. Submit Your Application – Once you’ve identified the target property, gathered your documents, and selected the right lending partner, you can submit your application with confidence.
5. Close and Invest – After approval, you’ll be on your way to expanding your real estate portfolio with a loan designed to work for you.

At First Heritage Mortgage, we understand the unique needs of real estate investors. Our team has the expertise to help you navigate the DSCR loan process and unlock the full potential of your investments.

With competitive rates, personalized guidance, and a proven track record of helping investors succeed, we’re here to make your goals a reality.

Ready to take the next step? Contact one of our loan officers today to learn more about how a DSCR loan can work for you.