Special Investor Mortgage: DSCR explained

How a DSCR Mortgage Works (and What You Need to Qualify)

Real estate investors often face a common problem when financing rental properties: traditional mortgages rely heavily on personal income, tax returns, and debt-to-income ratios. A DSCR mortgage solves that problem by focusing on the property’s income, not the borrower’s W-2s. But these are only available for experienced landlords.

DSCR mortgages have become increasingly popular in recent years, especially as more investors hold properties in LLCs, are self-employed, or prefer simpler documentation.

What Is a DSCR Mortgage?

DSCR stands for Debt Service Coverage Ratio. A DSCR mortgage is a type of investment property loan where approval is based primarily on whether the rental income from the property can cover the mortgage payment.

Instead of asking, “Can the borrower afford this loan?” the lender asks:

“Does this property generate enough income to pay for itself?”

These loans are typically used for:

• Long-term rental properties

• Short-term rentals (depending on lender)

• Single-family homes, condos, and small multifamily properties

They are not intended for primary residences.

How the Debt Service Coverage Ratio Is Calculated

The DSCR formula is straightforward:

DSCR = Monthly Rental Income ÷ Monthly Housing Payment

The housing payment usually includes:

• Principal and interest

• Property taxes

• Insurance

• HOA dues (if applicable)

Example:

• Monthly rent: $2,500

• Monthly mortgage payment (PITI): $2,250

DSCR = 2,500 ÷ 2,250 = 1.11

A DSCR of 1.00 means the property breaks even. Anything above 1.00 indicates positive cash flow (before maintenance and other operating expenses).

Typical DSCR Requirements

DSCR loan guidelines are not standardized like conventional loans. They vary by lender and market conditions, but the ranges below reflect what is commonly available in 2025.

1. Minimum DSCR Ratio

• 1.00 is the most common minimum

• Some lenders allow 0.75–0.99 with higher rates or larger down payments

• Higher DSCR ratios often qualify for better pricing

Importantly, many lenders allow future market rent using an appraiser’s rent schedule, not just current leases.

2. Credit Score Requirements

• Typical minimum: 620–660

• Better pricing usually starts around 680+

Unlike conventional loans, minor credit blemishes often matter less than the overall profile.

3. Down Payment Requirements

DSCR loans require more equity than owner-occupied loans:

• 20–25% down for stronger borrowers and DSCR ≥ 1.00

• 25–30% down for lower DSCRs or lower credit scores

Loan-to-value limits are usually capped at 70–80%.

4. Income Documentation

This is where DSCR loans stand apart.

Typically not required:

• Tax returns

• W-2s

• Pay stubs

• Debt-to-income calculations

Instead, lenders focus on:

• Lease agreements or market rent

• Appraisal with rent schedule

• Property cash flow

Some lenders still verify that the borrower has a basic ability to repay, but it is far less intrusive than conventional underwriting.

5. Cash Reserves

Most lenders require reserves, usually expressed in months of housing payments:

• 3–6 months is common

• Higher loan amounts or lower DSCRs may require more

Reserves can often be held in personal or business accounts.

6. Property Types Allowed

DSCR loans typically allow:

• Single-family rentals

• Condos (with some restrictions)

• 2–4 unit properties

• Short-term rentals (Airbnb/VRBO), depending on lender

Some lenders cap the total number of financed properties per borrower, but limits are generally higher than conventional loans.

Interest Rates and Costs

DSCR mortgage rates are usually higher than conventional investment property loans, reflecting the reduced documentation and risk model.

Key points to know:

• Rates are commonly 0.50%–1.50% higher than conventional investment loans

• Points are common and can often be used to buy the rate down

• Prepayment penalties typically apply, especially in the first 1–5 years

This trade-off often makes sense for investors prioritizing scalability, flexibility, or speed.

Who a DSCR Mortgage Is Best For

DSCR loans are particularly well-suited for:

• Real estate investors with multiple properties

• Self-employed borrowers with complex tax returns

• Investors buying or refinancing rental properties in LLCs

• Buyers who want to qualify based on property performance, not personal income

They are less ideal for first-time buyers or anyone purchasing a primary residence.

Final Thoughts

A DSCR mortgage shifts the focus from personal income to property performance, making it a powerful tool for real estate investors. While rates and down payment requirements are higher than traditional loans, the flexibility and simplicity often outweigh the added cost.

As always, DSCR guidelines vary by lender and change with market conditions. Working with a lender who actively originates DSCR loans — not one who treats them as a niche product — is critical to getting accurate terms and avoiding surprises.