DSCR Loans Explained – DSCR Loan Calculator

Hey, what’s up, everybody? It’s Rahul here. Thanks so much for joining me today! In this article, we’re going to talk about DSCR loans for investors. If you’re looking to buy residential real estate—like houses or small apartment buildings (one to four units, or even five to eight units)—but don’t know where to start, this is for you. Maybe you have poor credit, or you’re not sure how to qualify for a loan. Maybe you already own properties but don’t have a job, so you can’t get a traditional loan. If that sounds like you, the DSCR loan could be the perfect solution. Here’s the best part: As long as the property makes enough money (cash flows), we can usually get you a loan to help you achieve your investment goals. Let’s break it down and see how it works!

What is a DSCR Loan?

A DSCR (Debt Service Coverage Ratio) loan is a financing option for investment properties. It’s based on the property’s cash flow rather than your personal income or employment status. Here’s how it works –

1. Rental Income – We use the property’s rental income—either the current income if it’s already rented or the projected income through an appraisal if it’s a new investment property.
2. Debt Service Coverage Ratio (DSCR) – We divide the rental income by the property’s principal, interest, taxes, and insurance (PITI). The resulting number is the DSCR.
3. Qualification – If the DSCR is 1.0 or higher, you can qualify for the loan, provided you meet other requirements like the minimum down payment.

In some cases, a 0.80 DSCR is acceptable, especially in markets where cash flow is improving. However, most lenders prefer a ratio of 1.0 or higher. The higher the DSCR, the easier it is to qualify because it indicates stronger cash flow.

Key Guidelines for DSCR Loans

Here’s what you need to know about DSCR loans –

1. Loan Amount – You can borrow up to $2 million for investment properties. This loan is not for primary residences or second homes.
2. Eligible Transactions – DSCR loans can be used for purchases, rate-and-term refinances, and cash-out refinances. If you already own an investment property with significant equity but don’t have a job, you can still access that equity as long as the property cash flows after the refinance.
3. No Personal Income Required – Unlike traditional loans, DSCR loans don’t require proof of personal income or employment. The loan is based solely on the property’s cash flow.
4. No Property Limit – There’s no limit on the number of properties you can finance with DSCR loans. Conventional loans typically cap at 10 properties, but with DSCR loans, you can finance 100 properties—as long as each one cash flows.
5. Loan Terms – You can choose between 30-year fixed and adjustable-rate mortgages (ARMs). Most investors prefer the 30-year fixed option. Interest-only options are also available to improve cash flow.
6. Down Payment – For purchases, you can put down as little as 15%. For refinances, you’ll need 20% to 25% equity in the property.
7. Credit Score – You can qualify with a credit score as low as 640.
8. Non-Warrantable Condos – DSCR loans allow financing for non-warrantable condos, which are typically hard to finance due to litigation or structural issues. As long as the property cash flows, you can get a loan.
9. Short-Term Rentals – DSCR loans work for short-term rentals, like vacation properties. You can use the projected rental income to qualify.
10. Holding Structure – You can hold the property in your personal name, an LLC, an S-corp, or a C-corp. LLCs and S-corps are often preferred for liability protection.

Why Choose a DSCR Loan?

If you’re an investor looking to grow your portfolio, a DSCR loan is one of the best options available. Here’s why:

• Flexibility – You don’t need a job or personal income to qualify. The loan is based on the property’s cash flow.
• No Property Limit – You can finance as many properties as you want, as long as they cash flow.
• Low Credit Score Requirement – You can qualify with a credit score as low as 640.
• Short-Term Rentals Allowed – Vacation properties and other short-term rentals are eligible.
• Non-Warrantable Condos – You can finance properties that are typically hard to fund.
• Borrowed Down Payment – You can even borrow the down payment funds if needed.

DSCR Loan Calculator

Loan Amount – $200,000
Monthly Rent – $2,000

Take a sheet of paper and write down your own numbers as we go through this example. Your numbers might be different—maybe your loan amount is $100,000 or $400,000. The goal is to understand the components of a DSCR loan.

Step 1 – Calculate Monthly Costs

Next, we need to calculate the costs associated with the property. We already know the income (rents), so now we need to factor in the costs. These include:

• Taxes – Let’s say annual taxes are $2,400. Divide this by 12 to get the monthly cost – $2,400 ÷ 12 = $200 per month.
• Insurance – Let’s assume annual insurance is $1,800. Divide this by 12 – $1,800 ÷ 12 = $150 per month.
• HOA (Homeowners Association) Fees – If applicable, let’s assume a monthly HOA fee of $250.

Total Monthly Costs (excluding mortgage payment) – $200 (taxes) + $150 (insurance) + $250 (HOA) = $600 per month.

Step 2 – Loan Options

DSCR loans have become very sophisticated, offering various options:

• 30-year fixed
• 40-year fixed
• Interest-only loans
• 3/5/7-year ARMs

You need to determine which option best fits your needs. If cash flow is your priority, you’ll need to run the numbers for each option.

Step 3 – Calculate Monthly Mortgage Payments

Let’s assume an interest rate of 8% for simplicity. Use a calculator like calculator.net to determine the monthly payments for each loan option.

• 30-Year Fixed Loan –
  • Loan Amount – $200,000
  • Interest Rate – 8%
  • Monthly Payment – $1,468
• 40-Year Fixed Loan –
  • Loan Amount – $200,000
  • Interest Rate – 8%
  • Monthly Payment – $1,390
• Interest-Only Loan –
  • Loan Amount – $200,000
  • Interest Rate – 8%
  • Monthly Interest Payment – $1,333

Step 4 – Total Monthly Expenses

Now, add the monthly costs ($600) to each loan payment to get the total monthly expenses for each option.

• 30-Year Fixed – $1,468 (mortgage) + $600 (costs) = $2,068
• 40-Year Fixed – $1,390 (mortgage) + $600 (costs) = $1,990
• Interest-Only – $1,333 (interest) + $600 (costs) = $1,933

Step 6 – Calculate DSCR

Now, divide the monthly rent ($2,000) by the total monthly expenses for each option to get the Debt Service Coverage Ratio (DSCR).

• 30-Year Fixed – $2,000 ÷ $2,068 = 0.967
• 40-Year Fixed – $2,000 ÷ $1,990 = 1.005
• Interest-Only – $2,000 ÷ $1,933 = 1.034

A DSCR of 1 or higher means the rental income covers the expenses, which is favorable for both you and the lender.

A DSCR below 1 means the rental income doesn’t fully cover the expenses, which may result in higher rates or less favorable terms.

In our example –

• The 30-year fixed loan has a DSCR of 0.967, which is below 1.
• The 40-year fixed loan has a DSCR of 1.005, which is just above 1.
• The interest-only loan has a DSCR of 1.034, which is also above 1.

The higher the DSCR, the better the terms and rates you’ll qualify for.

Frequently Asked Questions

Also Read, No Credit Check Loans 2025 – Get Loans Without Credit Check

If you’re ready to invest in real estate but don’t know where to start, a DSCR loan could be the perfect solution. It’s a flexible, investor-friendly option that focuses on the property’s cash flow rather than your personal financial situation. Whether you’re a first-time investor or a seasoned pro, this loan can help you achieve your goals.