What are DSCR Loans?

What Are DSCR Loans?

If you're a real estate investor—or planning to become one—you’ve probably heard of DSCR loans. But what exactly are they, and why are they becoming a popular tool for investors?

DSCR Defined

DSCR stands for Debt Service Coverage Ratio. It's a financial metric lenders use to determine whether a property's income can cover its debt obligations—specifically, the monthly loan payment.

Instead of looking at your W-2s, tax returns, or personal income, lenders focus on the cash flow of the property itself.

The Formula

At its core, DSCR is calculated as:

DSCR = Net Operating Income (NOI) ÷ Debt Payments

• A DSCR of 1.0 means the property brings in just enough income to cover the loan payments.

• A DSCR above 1.0 means there’s a cushion—the property earns more than the loan costs.

• A DSCR below 1.0 indicates negative cash flow, which could raise red flags for lenders.

Most lenders require a minimum DSCR, often around 1.00, to approve, however, we have many options.

What kind of properties are possible with DSCR?

✅ Properties That Can Be Financed:

• Single-family rental homes

• 2–4 unit multifamily properties

• Condos and townhomes (if allowed by the lender)

• Short-term rentals / Airbnb properties (varies by lender—some require historical rental income or proof of bookings)

• Long-term rental properties

• Mixed-use properties (only if the majority of square footage/income is residential)

• Turnkey or rent-ready properties
  

❌ Properties That Cannot Be Financed:

• Primary residences – DSCR loans are strictly for investment purposes.

• Second homes/vacation homes – These don’t usually generate consistent income.

• Raw land or lots – No income = no DSCR.

• Fix-and-flips – These don’t have stable rental income; better suited for hard money or rehab loans.

• Commercial-only properties – Office buildings, retail, or industrial spaces usually fall outside DSCR guidelines unless it's a mixed-use case.

• Properties with major habitability issues – If it's unlivable or requires major rehab, it likely won’t qualify.

Who Uses DSCR Loans?

These loans are a go-to option for real estate investors, especially those with multiple properties or unconventional income sources. They’re ideal if you:

• Own or are buying rental property

• Don’t want to—or can’t—qualify with traditional income documentation.

• Are self-employed, retired without income, or otherwise outside the W-2 world

Key Benefits

• No personal income verification: Approval is based on the property’s income, not yours.

• Simplified paperwork: No tax returns or pay stubs needed.

• Great for portfolio growth: Allows investors to scale faster by focusing on property performance.

Things to Keep in Mind

• Higher rates: DSCR loans may come with slightly higher interest rates than conventional loans.

• Larger down payments: Typically, 20–25% down is required.

• Not for primary residences: These loans are meant for investment properties only.

• Not for first time home buyers: Although possible, dscr loans are typically for people who are not first time home buyers.

Final Thoughts

DSCR loans offer flexibility and speed for investors focused on rental income. If you're growing a real estate portfolio and prefer not to jump through traditional income verification hoops, this type of financing might be exactly what you need.