DSCR Investor Loan

How DSCR is calculated

DSCR = monthly rent ÷ monthly PITIA (principal, interest, property taxes, insurance and HOA dues).

• $3,000 rent ÷ $2,500 payment = 1.20: the rent covers the payment with room to spare
• $2,500 rent ÷ $2,500 payment = 1.00: the rent exactly covers the payment
• $2,000 rent ÷ $2,500 payment = 0.80: the rent covers 80% of the payment

Some lenders use net operating income against annual debt service, which works the same way on an annual basis. Rent comes from an existing lease or the appraiser's market rent estimate, whichever the program allows.

What ratio do lenders want

Most lenders look for a DSCR between 1.0 and 1.25. A higher ratio usually earns better pricing. Some programs allow ratios as low as 0.75, or even no-ratio loans.

Ways to improve your ratio: put more down, choose interest-only, buy down the rate or pick a property with stronger rent.

Typical requirements

• Down payment: about 20% to 25%, higher for lower ratios or credit
• Maximum loan-to-value: up to about 80% on purchases
• Credit: 660+ credit score
• Reserves: commonly 3 to 12 months of payments
• Experience: not required by many lenders, though experienced investors may get better terms

Eligible properties

Single-family rentals, 2 to 4 unit properties, condos and townhomes are the most common. Many lenders also finance short-term rentals, small multifamily buildings and portfolios of several homes in one loan. The home cannot be your primary residence.

Short-term rentals

For Airbnb or Vrbo properties, lenders may use 12 months of booking history or a market study of comparable short-term rentals, often with a discount for vacancy and management. Local short-term rental rules must allow the use.

Loan terms and structures

• 30-year fixed for long-term holds and predictable payments
• 5, 7 or 10-year ARMs for lower starting rates
• Interest-only periods to boost cash flow
• Bridge and short-term financing for properties being renovated or stabilized, with some lenders

Rates, fees and prepayment penalties

DSCR rates move with the market and depend on the ratio, down payment, credit and loan size. Expect standard costs such as origination, underwriting, appraisal, title and closing fees.

Many DSCR loans include a prepayment penalty, such as 5-4-3-2-1 (5% in year one down to 1% in year five) or a shorter 3-year schedule. We will lay out each option in writing.

DSCR cash-out refinance

Investors can refinance rentals to pull out equity for the next purchase or a renovation, commonly up to about 70% to 75% of value. Some lenders require a short ownership period before a cash-out refinance, while others allow delayed financing after a cash purchase.

What to compare between DSCR lenders

• Minimum ratio and how rent is calculated
• Maximum loan-to-value for purchase and cash-out
• Prepayment penalty schedule
• Whether short-term rentals and LLCs are allowed
• Reserve requirements and closing speed
• Whether fees are disclosed upfront