What a DSCR loan is
A DSCR (debt service coverage ratio) loan qualifies an investment property on its own cash flow. The lender never asks for W-2s, pay stubs, tax returns, or employment verification — the question is simply whether the rent covers the mortgage payment. That makes DSCR the default financing tool for self-employed investors, portfolio builders, and anyone whose tax returns undersell their real income.
The coverage formula
DSCR = monthly rent ÷ monthly PITIA (principal, interest, taxes, insurance, and association dues).
Worked example: a $465,000 rental at 70% LTV carries a $325,500 loan. Say principal and interest run about $1,950, taxes and insurance add roughly $425, and there is no HOA. PITIA is ~$2,375. At $3,350 market rent, coverage is 3,350 ÷ 2,375 ≈ 1.41× — a strong file most lenders will compete for.
- 1.25× and up: strong coverage; best pricing tiers.
- 1.0–1.25×: qualifies broadly, at slightly tighter pricing.
- Under 1.0×: sub-1.0 programs exist, but leverage usually caps near 70% and the lender panel narrows.
Typical requirements
| Factor | Typical range |
|---|---|
| Credit score | 640 minimum on most programs; 700+ unlocks meaningfully better pricing |
| Max LTV | 75–80% purchase; cash-out usually caps 5% lower |
| Reserves | 3–6 months of PITIA is common |
| Rent basis | Lease in place, or market rent from the appraiser's rent schedule (Form 1007) |
| Property types | 1–4 unit residential; many lenders also do condos and small multifamily |
The prepayment penalty trade
DSCR pricing is quoted against a prepayment penalty structure, usually a step-down (e.g., 5-4-3-2-1% of balance by year). The longer you accept, the better the rate:
- 5-year prepay: lowest rate — built for buy-and-hold.
- 3-year prepay: a middle path if you may refinance mid-hold.
- No prepay: full exit freedom, typically ~0.5% higher in rate.
Match the structure to your exit plan, not to the lowest sticker rate. Paying off a 5-year-prepay loan in year two can erase the rate savings several times over.
LLC and entity vesting
Most DSCR lenders happily close in an LLC — often preferred, since these are business-purpose loans. Expect to provide the operating agreement and EIN letter, and to sign a personal guaranty. Vesting in an entity does not change the coverage math.
What moves your rate
Four levers dominate DSCR pricing: credit band, LTV (each 5% step down usually buys a better tier), prepay structure, and purpose (cash-out refinances price wider than purchases). Coverage itself matters at the margins — a 1.4× file has more lender options than a 1.05× file.
Price your DSCR scenario in minutes
Enter the property value, rent, and leverage — the coverage ratio and three prepay structures price live. No documents, no login — live indicative pricing as you answer, then a licensed loan officer reviews your exact scenario.
RUN MY SCENARIO →