DSCR Loans

What is a DSCR Loan?

A DSCR loan, or Debt Service Coverage Ratio loan, is a type of investment property loan. It’s based on the income the property is expected to generate.

Instead of focusing on the borrower’s income, lenders look at the property’s Debt Service Coverage Ratio (DSCR).

How is Debt Service Coverage Ratio Calculated?

The Debt Service Coverage Ratio is calculated by dividing the property’s net operating income by its total debt service.

In simpler terms, it’s the ratio of the property’s income to its debt obligations.

The Importance of DSCR in Real Estate Investing

DSCR is a crucial factor in real estate investing. It helps investors and lenders assess the financial health of an investment property.

A high DSCR indicates that the property generates enough income to cover its debt obligations. This makes it an attractive option for lenders.

Benefits of Using a DSCR Loan for Investment Property

DSCR loans offer several benefits for real estate investors. They provide an alternative financing option for those who may not qualify for traditional loans.

These loans focus on the property’s income potential, not the borrower’s personal income. This makes them ideal for investors with multiple properties or those with variable income.

Key benefits of DSCR loans include:

1. Flexibility in income verification

2. Potential for higher loan amounts

3. Suitable for various property types, including multifamily and commercial properties

4. Can be used for portfolio diversification

Comparing DSCR Loans with Traditional Mortgages

DSCR loans differ significantly from traditional mortgages. Traditional mortgages primarily focus on the borrower’s personal income and credit score.

In contrast, DSCR loans focus on the income potential of the property itself. This makes them a viable option for investors with strong rental markets but variable personal income. 


Preparing to Apply for a DSCR Loan

Before applying for a DSCR loan, it’s crucial to understand your property’s financial standing. This includes knowing its income potential and current debt obligations.

Also, you should be aware of the lender’s requirements. These may vary, but understanding the basics will help you prepare.

Calculating Your Property’s DSCR

To calculate your property’s DSCR, divide its annual net operating income by its annual debt service. The result is your DSCR.


A DSCR of 1.0 means your income covers your debt exactly. Anything above 1.0 indicates a positive cash flow.

Eligibility Criteria for DSCR Loans

Lenders have different criteria for DSCR loans. However, some common requirements include:

1. A minimum DSCR, often around 1.00-12.25

2. Potential for higher loan amounts

3. A property in good condition