DSCR Loan Resource Center

Debt-service coverage ratio (DSCR) loans allow real estate investors to qualify for a mortgage based on the income their property generates, instead of their personal income. Learn how to avoid traditional mortgage requirements and obtain funding through Visio Lending.

Table of Contents

What is a Debt-Service Ratio (DSCR) Loan?

A debt-service coverage ratio (DSCR) loan helps investors obtain financing without the strict requirements of a traditional mortgage. While other mortgage types use personal income to determine a debt-to-income ratio (DTI) for eligibility, a DSCR loan leverages the property's performance as an asset. DSCR loans are the perfect option for all real estate investors, especially those with a variable income.

DSCR vs. Other Loan Types

	DSCR	Alternatives
Cumulative cash required for all financed properties	No	Yes
Tax return required	No	Yes
Paystub required	No	Yes
W-2 required	No	Yes
Finance in a legal entity	Yes	No
Finance vacant property with appraised rental income	Yes	No
Qualify with rental income	Yes	No
Finance more than 10 investment properties	Yes	No

Why Should I Use a DSCR Loan?

The top three use cases for DSCR loans include:

Purchasing a long-term rental (e.g., a house leased for a year) or a short-term rental (e.g., a vacation property)
Using a cash-out refinance to access equity from a rental property for purchasing another investment or funding renovations on the same or a different property
Using a rate-and-term refinance to convert a short-term hard money loan into a long-term DSCR loan

Real estate investors prefer DSCR loans because they can qualify based on their property’s income potential rather than having lenders evaluate their DTI. But that’s just one of the advantages. Here are more ways DSCR loans can benefit investors:

Simpler loan documentation
The ability to borrow through an LLC, partnerships and limited partnerships
Financing for a greater variety of property types
The opportunity to scale at a faster rate
Quicker closing times

What are typical DSCR loan property types?

DSCR loans generally can be used for the following property types:

Single-family (1-4 unit) residential rentals
Vacation rentals

Short-Term Rental Guide

What Are Short-Term Rental Loans? If you’re looking to purchase a property to list on Airbnb or Vrbo,...

Long-Term Rental Guide

If you’re interested in real estate and researching rental property investments, there are three types...

How to Start a Rental Property Business

Kickstart your journey in real estate with our 2024 guide on starting a rental property business. Get...

Green-modern-how-to-make-money-online-youtube-thumbnail-1-

How to Determine the Value of a Rental Property [Detailed Guide]

The ins and outs of rental property valuation, including a guide on how to determine the value of a rental...

Speak With a Loan Expert

How Do DSCR Loans Work?

DSCR is a metric that helps lenders understand a borrower's ability to pay back a loan based on the property’s monthly rental income. It's a simplified way to measure cash flow. To calculate the DSCR, you divide the monthly rent by the monthly principal, interest payments, taxes, insurance and association dues (PITIA).

What is a strong DSCR?

A DSCR of one indicates that the property’s income equals its expenses, meaning you’re breaking even. A DSCR of less than one signifies that the investor would need to subsidize the rest of the money with income from other sources.

Investors should target a minimum DSCR of 1.2, while 1.5 or higher is considered excellent. With DSCR, the rule is simple—the higher, the better.

Here are some examples to see how the DSCR calculation works.

Example one: DSCR > 1

Rent (income)= $2,350

➗

Principal + Interest = $1,600

Taxes = $250

Insurance = $150

Association dues = $35

PITIA (expenses) = $2,035

DSCR = 1.15 (positive cash flow)

Example two: DSCR < 1

Rent (income) = $2,100

➗

Principal + Interest = $1,800

Taxes = $250

Insurance = $150

Association dues = $35

PITIA (expenses) = $2,235

DSCR = 0.94 (negative cash flow)

What additional expenses are missing from DSCR?

While DSCR can help determine an asset’s potential, it falls short of providing a clear picture of the property’s cash flow. DSCR is a helpful metric, but it’s important to consider all possible costs associated with a specific property. Here are some of the common debt obligations to consider before applying for a DSCR loan.

Property Management Expenses

No matter the size of your investment property portfolio, ongoing maintenance and repair costs are expenses to consider as a part of your total financial obligations. We recommended setting aside funds for regular upkeep and unexpected repairs.

Vacancy Rates

While rental properties are meant to generate positive cash flow, vacancies are an inevitable challenge for many real estate investors. One month of vacancy results in an 8.4% loss in rental income for a specific property. To help negate the negative effects of vacancies, we suggest getting Rent Loss Insurance to assist with rental income in the event of a vacancy.

Tenant Acquisition Costs

An often overlooked aspect of owning rental properties is the tenant acquisition costs. While these types of expenses are not recurring, it’s important to understand all costs associated with marketing and advertising the property, screening potential tenants, contracting, etc. Acquisition costs should always be lower than a tenant’s lifetime value. As a rule of thumb, ongoing marketing and leasing expenses should range between 4% and 8% of the total annual rental income.

Income Taxes

The aspect that makes DSCR loans appealing to real estate investors is that lenders don’t consider your personal income or debt to determine eligibility. Now, that doesn’t mean Uncle Sam won’t be knocking on April 15. It’s important to keep the necessary documentation associated with your properties to leverage all possible tax deductions.

Amenities

As we discussed previously, high tenant acquisition costs and extended vacancies are detrimental to real estate investors, especially those with vacation rental properties. One of the best ways to quickly attract tenants is to provide them with high-quality amenities, including furniture, bedding, dishes, electronics, games, etc. While you may need to spend more up front, you may not have to worry about the cash flow later.

Free DSCR Calculator

How Do I Apply for a DSCR loan?

Visio leverages more than a decade of experience to provide you with the smoothest loan application process possible. From the initial application to closing, we support investors every step of the way. Here's an overview of our simplified application process.

Step 1

Start your application

During the application process, Visio will collect the necessary documentation to determine eligibility and expected financing terms. Since a property appraisal is required to confirm rental market value and ensure DSCR thresholds are met, we’ll order the appraisal at this time.

Application
Credit pull
Borrower’s authorization
Order appraisal
Primary ID
Purchase contract

Step 2

Complete loan file

Visio works with the borrower and third-party entities to compile a complete loan file to verify eligibility and terms.

Background check
Title and property tax certificate
Insurance (Flood and unnamed perils)
Entity documents
Reserves

Step 3

Approve and close the loan

Visio approves your loan and coordinates closing and funding with an approved title company.

Funding process
Closing and signature requirements

Step 4

Payment

The borrower submits their monthly loan and escrow payments to a loan servicer for payment collection and accounting.

What are DSCR loan requirements?

If you are an investor who’s looking to obtain a DSCR mortgage, make sure you meet these basic requirements:

Minimum Credit Score: Most DSCR lenders require a 680 credit score, with better rates for higher credit. Most lenders also have minimum tradeline requirements, including both amount and duration. Lenders will also consider whether you have any other significant credit events on your credit report, such as foreclosures, bankruptcies or past-due payments.

Minimum Down Payment or Equity: Down payment requirements may vary, but you can expect between 20% and 30% of the property’s purchase price.

Minimum Property Value: Most lenders have a minimum property value of $150,000.

Minimum Loan Amount: A good minimum standard is $75,000.

Why is my DSCR low?

There are a few factors that could lower your DSCR. Lenders usually require a minimum DSCR of 1.2. You may qualify for a DSCR mortgage initially, only to have certain numbers come back higher or lower than expected. Understanding these potential surprises upfront helps investors plan carefully and ensure positive cash flow.

High Insurance Costs

DSCR measures a property’s cash flow by dividing the monthly rent by the monthly principal, interest, taxes, insurance and association dues (PITIA). Higher insurance costs mean the debt obligations on the property increase. As a result, your DSCR decreases, which signals to lenders that a smaller portion of your rental income is available to cover debt payments.
If your DSCR suffers due to high insurance costs, consider shopping around for better rates, adjusting coverage where possible or increasing monthly rental income.

High Property Taxes

Similar to high insurance costs, high property taxes can negatively affect your DSCR and your ability to qualify for a loan. Your property taxes can be high for various reasons, including property reassessment, adjustment to local tax policies and more.

Lower Than Expected Rental Income

We often see properties rented above market value. When investors lower the rent, their rental income decreases. As a result, the DSCR drops down.

How can I improve my DSCR?

When it comes to DSCR, the lender loves to see a higher number, and so do you. It’s a win-win situation for everyone involved. Try implementing the following approaches to increase your DSCR.

Increase Rent Prices

You should approach rent increases tactfully. Increasing rent to make more money may not be illegal, but it can be viewed as unethical. It’s important to stay on top of market rents and adjust rent prices accordingly. With that said, increasing rent prices may improve overall cash flow, resulting in a higher DSCR.

Higher Down Payment for a Lower Interest Rate

By putting more money down initially, you increase the odds of receiving favorable rates and terms on your mortgage. On top of that, a lower monthly mortgage payment means less interest paid throughout the duration of the loan. As a result, your cash flow and DSCR increase.

Negotiate Your Taxes and Insurance

Other key debt obligations in the DSCR formula are taxes and insurance. Be sure to shop around for the best rates. However, you never want to sacrifice coverage for cost.

Submit a deal

Why Visio?

Founded in 2012 and headquartered in Austin, Texas, Visio Lending is the nation's leader in rental loans. We help investors grow their rental portfolios with streamlined processes, innovative technology and investor-friendly loan solutions. Our DSCR service is known for its low documentation, full 30-year terms with no balloon payments, identity protection through corporate financing and common-sense underwriting.

15+ Years of Experience

A+ BBB Rating

Nationwide DSCR Loans

19,000+ Closed Loans

Submit a deal

What Should I Look for in a DSCR Lender?

When comparing DSCR loan lenders, here are some questions to ask yourself.

What Are the Lender’s Rates and Fees?

It’s important to know exactly what your loan costs will be. The last thing you want is to arrive at the closing table with unexpected expenses. Most lenders charge an origination fee and one or more administrative fees, such as an underwriting or documentation fee. Additionally, watch for a prepayment penalty if you plan to sell the property in the near future.

What Are the Lender’s Eligible Property Types?

Some lenders specialize in DSCR Loan Programs for vacation rentals, while others do short- and long-term rental loans. Other common variations include warrantable vs. non-warrantable condos and multi-family vs. single-family homes. Determine your real estate investing goals and find a lender to help you achieve your dreams.

Is the Lender Focused on and Experienced in Working With Investors?

This may be one of the most important factors when determining a lending partner. Lenders who work with investors often understand the nuances associated with financing and have programs tailored to help investors’ needs. With new DSCR lenders on the market, it can be tough to decipher which lender fits your goals. Here is a list of questions to ask during the initial meeting.

How many DSCR loans has the company closed?
How long have they been offering and closing DSCR loans?
Do they have a dedicated team of operations personnel that processes and underwrites their DSCR loans?
What are their property insurance requirements?
What’s the policy regarding prepayment penalties?
Do they offer the ability to finance through an LLC or corporate entity?

While this isn’t meant to be an exhaustive list, it’s a great starting point to understand the key factors involved in the process

What People Are Saying

Chase, thank you and your Visio Team for your excellent work and help in making my transaction a success. It was a pleasure to work with you and I look forward to much more business with you all in 2024. EJ Paul, President, Eagle Commercial Funding Capital Corporation

Elliot EJ Paul

Google Review, 1/9/2024

Visio Lending has been incredibly easy to work for the property refinance process. They were responsive, provided excellent service and had very competitive rates. I look forward to working with them on many properties to come.

Andrew S.

Google Review, 1/9/2024

Recently closed three loans with an incredible processor Laura D. She is professional, knowledgeable and attentive. I wish I could have her on every file. Thank you for your hard work!!!

Brian M.

Google Review, 1/10/2024

DSCR Loan FAQs

What is a DSCR loan?

A DSCR loan is an alternative mortgage solution for real estate investors. While traditional home loans use personal income and overall debt commitments to determine DTI and eligibility, DSCR loans leverage the property’s earning potential as the primary qualification.

Debt-service coverage ratio (DSCR) is a metric used by lenders to assess the ability of the property to generate enough cash flow to cover its debt obligations, such as principal, interest, taxes, insurance and association dues.

How is DSCR calculated?

To calculate DSCR, you’ll divide the monthly rental income of a property by its monthly debt obligations.

DSCR = Monthly Rent ÷ Principal, Interest, Taxes, Insurance, and Association Dues (PITIA)

Try our DSCR Calculator to see if your prospective property meets minimum DSCR requirements.

What is the minimum down payment required for a DSCR loan?

Down payment requirements may vary by lender. However, investors seeking a DSCR loan should expect to put down between 20% and 30% of the property’s purchase price. While a 20% down payment is the minimum to receive a DSCR loan from Viso, you may need to put more down depending on various factors, including credit score, property type and market conditions.

What is the minimum credit score needed for a DSCR loan?

The minimum credit score requirements may vary by lender. Investors seeking a DSCR loan should aim for a credit score of at least 680. While 680 is the minimum, higher scores generally lead to more favorable rates and terms. In addition to scores, lenders may look at credit experience, which is based on the number as well as the type and length of tradelines listed on your credit report.

What documentation is needed for a DSCR loan?

Since DSCR lenders don’t look at personal income, documents like tax returns and pay stubs aren’t required. Although lenders require other types of documentation, which include:

One form of ID for each guarantor
Voided check
Insurance declaration page
Lender’s title insurance policy
Property appraisal
Business entity documents (if borrowing through a company)
HOA contact information (if applicable)
Current lender details (for both cash-out/rate and term refinances)
Purchase contract
Any addenda to the purchase contract

Do DSCR loans have prepayment penalties?

Yes, the majority of DSCR loans come with prepayment penalties. A prepayment penalty means the borrower is required to pay the lender an additional fee for paying off the loan early. Prepayment penalty structures may vary by lender. Here are the three common DSCR prepayment penalty structures:

Five-year step-down penalty: The 5/4/3/2/1 structure states that if the borrower pays off the loan in year one, they have a 5% prepayment penalty fee, in year two, a 4% fee and so forth
Three-year step-down penalty: The 3/2/1 structure is slightly different, requiring the borrower to pay a 3% fee if the loan is paid off in the first year, 2% in the second year, and 1% in the third year.
Fixed penalties: This structure will outline a specific percentage for a set period

Before committing to paying off the loan early, it’s important to check your loan agreement for specific information regarding the prepayment penalties.

What are the pros DSCR loans?

DSCR loans can be a great financing option for real estate investors. Here are some pros of DSCR loans that can help you determine if it’s the best solution for your overall investment strategy.

Pros of DSCR loans:

No personal income verification: DSCR is the primary qualifying metric instead of DTI
30-year fixed terms: Flexible terms with no balloon payments
Entity borrowing options: Investors can borrow under an LLC or a corporation
Scalability: Finance multiple properties with flexible portfolio limits. Higher thresholds are subject to executive approval
Streamlined process: Quick application and fast closing times

Can you refinance a DSCR loan?

Yes, you can refinance a DSCR loan. Just like traditional loans, DSCR loans offer both cash-out and rate and term refinance options. However, be sure to check whether refinancing will trigger a prepayment penalty.

Where is the best place to get a DSCR loan?

Visio Lending is regarded as the nation’s leader in DSCR loans. With more than a decade of experience helping residential real estate investors secure short- and long-term rental properties, we’ve refined and perfected the lending process. Our dependable and flexible loan options are perfect for both newcomers and veteran investors who are looking to obtain funding without the need to show personal income.