How DSCR loans work

The DSCR formula in plain English

DSCR = monthly rent / monthly PITIA. PITIA stands for principal, interest, taxes, insurance and association dues. In a flood zone, the required flood insurance is part of the insurance cost. If a property rents for $2,400 and PITIA is $2,000, then DSCR is 1.20.

DSCR	What it means	General lender view
1.25 or higher	Rent exceeds the payment by 25% or more	Strong. Pricing generally improves as the ratio rises
1.00 to 1.24	Rent covers the payment	Many programs commonly accept this range
0.75 to 0.99	Rent falls a little short	Select programs allow it, often with a lower LTV, more reserves or higher pricing. See DSCR below 1.0
Below 0.75 or no-ratio	Rent falls well short	A few no-ratio programs exist with lower LTV and higher credit and reserve needs. Otherwise the numbers need to change

General guidance. Each lender sets its own minimum and adjustments, so this is not a promise of approval.

Where the rent number comes from

On a property with a tenant, the lender usually uses the signed lease, and some programs use the lower of the lease rent and the appraiser's market rent. On a vacant property, or one you are buying with the intent to rent, the lender uses the market rent from the appraisal's rent schedule. For short-term rentals, some programs use 12 months of platform history or a third-party income projection. The rent figure is the single most important number in the file, so know it before you write an offer.

Step by step: from quote to closing

1. Run the numbers. Estimate rent, taxes, insurance and the loan amount, then check the ratio in the calculator.
2. Request a quote. Tell us the property, price, rent estimate, credit range and whether you will close in an LLC. We compare lenders that fit.
3. Choose a lender and lock. You see rate, fees, prepayment terms and reserves side by side, then choose and lock.
4. Submit documents. Typically ID, credit authorization, proof of funds, the lease or contract, entity documents for an LLC, and the insurance quote.
5. Appraisal and underwriting. The appraisal confirms value and market rent. Underwriting reviews the property and your assets.
6. Close with your attorney. North Carolina and South Carolina closings run through an attorney. You sign, fund and collect the keys or the cash-out.

What the lender looks at besides DSCR

• Credit score and history. Your personal credit is still reviewed, even though your income is not.
• Loan-to-value. Maximum LTV depends on the purchase or refinance type, credit, the ratio and your experience. See the program ranges.
• Reserves. Cash left after closing, often counted in months of PITIA.
• Property type and condition. Rentable condition is required. Heavy rehab is a different loan.
• Borrower entity. Individual or LLC, and any guarantor.

Is a DSCR loan right for you?

A DSCR loan tends to fit first-time investors, investors who own more than a few properties, are self-employed, have tax returns that understate cash flow, or want to buy in an LLC. If you have strong W-2 income, few properties and want the lowest possible rate, compare it with a conventional investment loan. We can quote both. New to investing? See first-time investor DSCR loans.