DSCR loan requirements for investors
By Austin Frangoules | Updated | 6 min read
A DSCR loan qualifies you on the property's rent instead of your personal income. Most DSCR lenders want the rent to cover the full payment with taxes, insurance and HOA at least 1.0 times, with better pricing at 1.25, plus a solid credit score, a down payment or equity of about 20% to 25%, and cash reserves. Exact requirements vary by lender and change often.
What a DSCR loan is
DSCR stands for debt service coverage ratio. A DSCR loan is a long-term rental loan, often a 30-year fixed, sized on how well the rent covers the payment. The lender does not use your tax returns or pay stubs to qualify you. That makes it a common exit for BRRRR investors and a common choice for buyers with several rentals or complex income.
These loans are non-QM, which means each lender writes its own rules. The ranges below are typical planning numbers, not promises. Confirm the current guidelines with your lender before you count on any of them.
How lenders calculate DSCR
Most DSCR lenders divide the monthly rent by the full monthly payment, called PITIA: principal, interest, taxes, insurance and association dues. Flood insurance counts too when it applies. A DSCR of 1.25 means the rent is 25% more than the payment.
- Monthly rent
- $2,150
- Principal and interest: $187,500 loan, 30 years, 6.875% (illustrative rate)
- $1,231.74
- Property taxes
- $260.42
- Insurance
- $105.00
- PITIA
- $1,597.16
The rate is illustrative, not a quote or an available rate. Lender DSCR uses gross rent and ignores vacancy, repairs and management.
Note what this ratio leaves out. Lender DSCR uses gross rent, so it ignores vacancy, repairs, capital reserves and management. A 1.35 DSCR can still mean thin cash flow once those costs show up. Some analysts also compute a commercial DSCR, NOI divided by annual debt service. It is a different number, so always label which one you mean.
DSCR loan requirements at a glance
| Requirement | Typical range |
|---|---|
| Minimum DSCR | 1.00 standard; 1.10 and 1.25 for better pricing; some lenders go below 1.00 with lower LTV |
| Credit score | Best terms around 740 and up; LTV often cut below 680 |
| Max LTV, 1 unit cash-out | Often 75%; up to about 80% with strong credit and DSCR at some lenders |
| Max LTV, 2 to 4 units | Usually about 5 points lower than 1 unit |
| Reserves | Often 2 to 6 months of PITIA in the bank after closing |
| Minimum loan | Often $75,000 to $100,000 |
| Seasoning for cash-out | Set by each lender; early refis may use cost basis instead of appraisal |
| Prepayment penalty | Common; 3-year and 5-year step-downs, or none at a higher rate |
Minimum DSCR and pricing tiers
Many DSCR lenders price in tiers. A ratio of 1.25 or higher usually gets the best rate and the highest LTV. Between 1.10 and 1.25 the rate is a bit higher. Between 1.00 and 1.10 is often the standard minimum. Below 1.00, some lenders offer no-ratio programs, typically at 60% to 70% LTV with a higher rate, and some want compensating factors like extra reserves.
Credit score and LTV
Credit and LTV move together. A common pattern is 75% LTV on a 1-unit cash-out with a DSCR at or above 1.0 and a credit score around 700 or higher. Some lenders go to about 80% with a score of 740 or more and a DSCR of 1.25 or more. Below 680, many cap the loan at 70% or less. Expect 2 to 4 unit properties to run about five points lower.
Which rent counts
Lenders do not all use the same rent. The four common choices:
- The signed lease. Simple, if you have a tenant in place.
- Market rent from the appraisal. Appraisers fill out a rent schedule, often called the 1007, with comparable rents.
- The lesser of the two. The most conservative and fairly common.
- Short-term rental income with a haircut. Lenders that allow short-term rental income often count only about 75% to 80% of it, and may cut LTV if there is no 12-month booking history.
If your rent estimate is aggressive, check it against HUD's fair market rent and real rent comps before you size the loan.
Reserves, minimum loan and prepayment penalties
Three smaller requirements catch people late in the process. First, reserves. Many DSCR lenders want proof of about 2 to 6 months of PITIA in the bank after closing, and some ask for more when you own several financed rentals. Reserves are not a cost, but the cash has to be there and documented.
Second, the minimum loan. Many programs start around $75,000 to $100,000, so a low-priced house may not size a loan big enough to qualify. Third, the prepayment penalty. Common structures step down over three or five years, for example 3%, 2%, then 1%. Choosing no penalty usually means a higher rate, so match the penalty to how long you expect to keep the loan.
How much you can borrow
Two limits size a DSCR loan: the LTV limit and the DSCR limit. The lender gives you the smaller one. To find the DSCR limit, work backward from the rent: divide rent by the minimum DSCR to get the largest allowed PITIA, subtract taxes, insurance and HOA to get the largest principal and interest, then find the loan that payment supports.
- Monthly rent
- $2,000
- Largest PITIA at a 1.25 minimum: $2,000 / 1.25
- $1,600
- Taxes, insurance and HOA
- -$400
- Largest principal and interest
- $1,200
- Loan that $1,200 supports, 30 years at 7.0% (illustrative)
- $180,369
- LTV limit: 75% x $250,000 value
- $187,500
Here the DSCR limit binds, not the LTV. A lower minimum DSCR tier would size a bigger loan at a higher rate. Illustrative only.
Run The Deal sizes each DSCR tier this way, keeps the largest loan, and tells you which limit bound: LTV, DSCR, the program cap or the minimum loan.
Common mistakes
- Leaving out HOA or flood insurance from PITIA. Both lower your DSCR.
- Using pre-rehab taxes. After a rehab the assessment may rise toward the new value, and so does the payment.
- Counting on 80% LTV without the credit score, DSCR and seasoning that tier needs.
- Forgetting the minimum loan. A low-value house may not size a loan big enough to qualify.
- Ignoring the prepayment penalty when you might sell or refinance within a few years.
- Confusing lender DSCR with cash flow. A passing ratio does not mean the rental makes money after repairs and vacancy.
Planning a BRRRR exit? Read our guide to BRRRR refinance seasoning next. Then check your ratio and loan size in the free DSCR calculator.
Questions
What is the minimum DSCR for a DSCR loan?
Many lenders use 1.00 as the standard minimum and give better pricing at 1.10 and 1.25. Some offer programs below 1.00 at lower LTVs and higher rates. Requirements vary by lender.
Do DSCR loans require tax returns?
Usually not for income. The lender qualifies the loan on the property's rent. You will still need credit, assets for reserves and the down payment, and property documents.
How much down payment does a DSCR loan need?
Often 20% to 25% on a purchase, or the matching equity on a refinance. Lower credit scores, multi-unit properties and DSCRs under 1.0 usually need more.
Can I use Airbnb income for a DSCR loan?
Some lenders allow short-term rental income, often counting only about 75% to 80% of it and sometimes lowering LTV without a 12-month history. Ask each lender how it counts STR income.
For education only. Not legal, tax, lending or investment advice. Loan programs and guidelines change and vary by lender; confirm current terms with your lender.