What is a DSCR loan?
A DSCR loan is an investment property mortgage whose size the lender sets from the rent the property earns, rather than from the salary or tax returns of the borrower.
The DSCR loan meaning in plain words
A conventional mortgage asks about your income and your existing debts. A DSCR loan puts a narrower question to the property: does its rent cover the mortgage payment, tax bill, insurance and HOA dues? The DSCR (debt service coverage ratio) is the answer, and it determines both whether the loan proceeds and its maximum size.
Because this property is not the borrower's home, lenders call the loans business-purpose loans. Because they fall outside agency rules covering most owner-occupied mortgages, each lender sets its own guidelines for credit, the down payment and the property type.
From offer to closing: how a DSCR loan works
An appraisal ordered by the lender includes a rent schedule with the appraiser's market rent estimate, or the lender reads the signed lease. The lender prices the loan, calculates PITIA and divides the rent by that amount. If the ratio clears the minimum the lender requires, the file moves on to credit, reserves and title.
At closing, many lenders allow an LLC (limited liability company) to hold the loan, with the owner providing a personal guarantee. Common terms include 30 years, while some lenders provide 40 years or an interest-only period; most also attach a prepayment penalty during the first few years.
Which borrowers fit a DSCR loan
Owners with several rentals who have used up the room available under conventional limits use DSCR loans. So do buyers who are self-employed and whose tax returns show that income is low after write-offs, plus investors who want a company to hold the title. With one rental in mind and a steady salary, a first-time buyer will usually spend less on a conventional investment mortgage.
On our DSCR loan pros and cons page, we compare both loan types line by line.
The cost of a DSCR loan
Because lenders check fewer borrower details, rates run above conventional investment mortgages. The rate also depends on the ratio, the LTV (loan-to-value: how much of the price the loan covers) and the prepayment terms. We break down those factors on DSCR loan rates.
Check the published minimums the property clears with our DSCR loan calculator, using the rent and the expected payment, before you speak to a lender.