A DSCR loan, or Debt Service Coverage Ratio loan, is a type of mortgage loan used mostly by investors. Instead of looking at personal income, lenders evaluate the subject property’s income potential. The DSCR measures how well the property’s rental income cover its debts payment. For example, if a subject property generates $5,000 in rental income and the mortgage payment is $4,000, the DSCR would be 1.25 ($5,000 ÷ $4,000). Most lenders require a DSCR of at least 1.0 to 1.25 to approve the loan.
For a DSCR loan, lenders typically qualify investment properties rather than primary residences. These properties include Single-family rentals, Multi-family units (duplexes, triplexes, fourplexes, and apartment buildings); Short-term rental properties (like Airbnb or VRBO homes), Mixed-use properties (part residential, part commercial), Commercial real estate (office buildings, religious buildings, retail spaces, warehouses, etc.). Since DSCR loans focus on the subject property’s income, lenders want to see strong rental potential.
For the down payment requirement, lenders typically require 20% to 25% down, but it can vary based on the property’s cash flow, borrower’s credit score, and the lender’s guidelines. Some lenders might allow as low as 15% down if the DSCR is strong (1.25 or more).
For the percentage of rental income use, lenders typically use 100% of the rental income from the subject property to calculate the DSCR, but they often apply a rent expense ratio or vacancy factor. Most lenders consider 75% to 90% of the gross rental income to account for potential vacancies, maintenance, and other expenses. For example, if the property earns $5,000 per month in rent, the lender might use $3,700 to $4,500 of that income to determine whether it covers the mortgage payment.
For long term rental, most lenders will use around 75% to 85% of the rental income to qualify your loan, depending on their guidelines. They may also look at lease agreements or market rent appraisals to confirm the income.
If you want to learn more details about this DSCR loan, do not hesitate to contact our UFM team.