DSCR Loan for
Investment Rental Properties

What is a DSCR loan?

A DSCR or “Debt Service Coverage Ratio” loan is a special type of real estate loan that can be used to buy an income-producing rental property based on the property’s (prospective) rental income—you don’t have to show how much income you make personally. “Debt service” is a fancy word that means “paying the monthly mortgage payments.” The Debt Service Coverage Ratio loan is structured around the premise that your property’s monthly rental income will cover the monthly mortgage payments.

You can use a DSCR loan for residential rental properties, which means buildings that have 1-4 units, but also for commercial rental properties, which are buildings that have 5 or more units.

“Alejandro illustrates things in a way that you as a layman can follow the numbers, and you can see whether it makes sense or doesn’t make sense. I love working with Alejandro, and we are doing another transaction now.”

— Marcus, Real Estate Investor

Advantages of a DSCR loan:

  • A DSCR loan uses the Property’s Rental Income to qualify for the loan — regardless of your own income!

  • You can use the Property’s Rental Income to qualify even if the property is currently vacant

  • You don’t need to submit your tax returns to qualify

  • The loan application process for a DSCR loan is easier and faster than for buying a regular home

  • There is no limit on how many properties you can buy using DSCR loans

  • Purchases with DSCR loans do not appear on your credit report

  • DSCR loans enable the classic real estate investment play: let other people build your equity

Knowledge & experience

Alejandro Szita has an extensive background in commercial real estate, which helps him find his way around the intricacies of loans that originated in the commercial realm, such as DSCR loans.

He helps clients see the clear picture of the numbers, so that they can see if it makes sense or not. He also knows exactly what lenders are looking for when it comes to these types of loans, so that he can format the loan application package in the correct way that is easy to understand for the lenders’ underwriters. Additionally, he helps clients prepare for the realities of managing the real estate property after the loan is obtained, helping to set them up for long-term success.

Qualifying for a DSCR loan

As a rough guideline, the following are the basic requirements for qualifying for a DSCR loan:

  • DSCR loans are based on the rental income generated by the property you are buying

  • You need a FICO score of at least 680

  • You need a downpayment of 20% (although you will get a better interest rate with 30%)

  • You need to own your home for at least 1 year

Calculating the Debt Service Coverage Ratio:

To calculate the Debt Service Coverage Ratio (DSCR) of the investment, you take the monthly rental income of the property and you compare it with the monthly expenses of running the property. For DSCR qualification purposes, the expenses the lender cares about are the mortgage payments that you will be making plus the property taxes and insurance. These numbers are calculated on a yearly basis. So let's say, as a simple example, that a particular property produces $50,000 a year in rent ($4,167 per month).  And let's assume that on a yearly basis, your mortgage payments, your property taxes and your property insurance amount to $25,000 altogether.

That means, from the viewpoint of the lender, that you are generating twice as much as what you are paying. In this case, the debt service coverage ratio will be 2. That means that you will be “covering” the debt service (the paying of the monthly mortgage payments plus property taxes and insurance) by a factor of 2.

Most lenders do not require a DSCR of 2. For residential properties, some lenders will go as low as 1.0, and they do not require you to account for vacancies, property management fees, repairs and maintenance as part of your expenses (although we strongly recommend that you account for these anyway, to safeguard your profitability).

DSCR loans are very popular. Instead of having to use your income to qualify you to do the loan, you can use the income of the property to qualify you for the loan. This can allow you to build a portfolio of real estate investment properties, which you can use to build wealth or use as a financial cushion in times of economic uncertainty

Get A Free Brainstorming Consultation

We provide many different mortgage options. Please give us a call so we can find out about your specific situation and let you about your options. We will give you helpful advice and answer all your questions. 

Call us at 310-294-9417 for a free consultation, or self-schedule an appointment online.