**DSCR (Debt Service Coverage Ratio) definition**: **DSCR measures if rental property generates enough income to cover mortgage payments**.

Used by **DSCR lenders** to qualify investors **without verifying personal income/employment** (vs traditional loans requiring W-2s, tax returns). **DSCR formula**: **DSCR = Net Operating Income (NOI) ÷ Annual Debt Service**. **Net Operating Income (NOI)** = Gross rental income - Operating expenses (property tax, insurance, HOA, management fees, maintenance). **Does NOT include** mortgage payment (P&I). **Annual Debt Service** = Total mortgage payments for one year (P&I only, exclude tax/insurance escrowed). **DSCR interpretation**: **DSCR ≥ 1.25**: **Excellent** - property cash flows well, easy approval, best rates. **DSCR 1.20-1.24**: **Good** - meets most lenders minimum, standard rates. **DSCR 1.00-1.19**: **Break-even to marginal** - some lenders accept, higher rates (+0.5-1%), may require larger down payment (25-30%). **DSCR 0.75-0.99**: **Negative cash flow** - specialty DSCR lenders only, **rates +1-2%**, 30% down minimum, compensate with cash reserves. **DSCR <0.75**: **Rejected** - property loses too much money monthly, no financing available (or owner-occupied refinance only). **Example calculation 1: Positive cash flow DSCR**: **Property**: Single-family rental, $300,000 purchase price. **Gross rental income**: $2,400/month × 12 = **$28,800/year**. **Operating expenses**: Property tax: $3,600/year.

Homeowners insurance: $1,200/year.

HOA: $0.

Property management (10% rent): $2,880/year.

Maintenance reserve (5% rent): $1,440/year.

Vacancy allowance (5% rent): $1,440/year. **Total expenses**: $3,600 + $1,200 + $2,880 + $1,440 + $1,440 = **$10,560/year**. **NOI**: $28,800 - $10,560 = **$18,240/year**. **Loan amount**: $240,000 (20% down). **Interest rate**: 7.5% (2025 DSCR loan rate). **Term**: 30 years. **Monthly P&I**: $1,678. **Annual debt service**: $1,678 × 12 = **$20,136**. **DSCR**: $18,240 ÷ $20,136 = **0.91** (below 1.0 = negative cash flow). **Lender decision**: Most lenders reject DSCR <1.0. **Option 1**: Increase down payment to 30% ($90k down → $210k loan → $1,469/month P&I → $17,628 annual debt → DSCR = 1.03). **Option 2**: Find lender accepting 0.90-0.99 DSCR (higher rate 8.5%, larger down payment 30%). **Example calculation 2: Strong cash flow DSCR**: **Property**: Duplex, $400,000 purchase. **Gross rental income**: Unit 1: $1,800/month.

Unit 2: $1,750/month. **Total**: $3,550/month × 12 = **$42,600/year**. **Operating expenses**: Property tax: $4,800.

Insurance: $1,800.

Management (8% for multifamily): $3,408.

Maintenance (6%): $2,556.

Vacancy (4%): $1,704. **Total**: **$14,268/year**. **NOI**: $42,600 - $14,268 = **$28,332**. **Loan**: $320,000 (20% down), 7.5% rate, 30 years. **Monthly P&I**: $2,237. **Annual debt service**: $26,844. **DSCR**: $28,332 ÷ $26,844 = **1.055** (marginal, but positive). **Improvement strategy**: Increase rent $50/unit → $43,800 income → $29,532 NOI → **DSCR = 1.10** (acceptable for most lenders). **DSCR calculation tips (2025)**: **Use actual lease agreements** (not Zillow estimates) - lenders verify with signed leases or appraisal rent schedule. **Include all expenses** - forgetting property tax/insurance understates DSCR. **Use PITI for debt service if lender escrows** - some DSCR lenders include tax/insurance in debt calculation (ask lender). **Vacancy factor required** - most lenders mandate 3-10% vacancy deduction even if property 100% occupied. **Market rent vs actual rent** - if below-market rent, lender uses **lower of actual or market rent** (per appraisal). **Short-term rentals (Airbnb)** - use 12-month average (off-season months pull down DSCR). **Common mistakes**: **Using gross rent instead of NOI** (inflates DSCR).

Example: $2,000/month rent → $24,000/year.

Debt service $20,000. **Wrong DSCR**: $24,000 ÷ $20,000 = 1.20. **Correct DSCR** (after $8k expenses): $16,000 ÷ $20,000 = 0.80 (rejected). **Not subtracting vacancy** - 100% occupied today doesn't mean 100% forever. **Forgetting property management fee** (even if self-managing, lenders impute 8-10%). **Including mortgage payment in expenses** - NOI calculated **before** debt service. **DSCR by lender minimum (2025)**: **Portfolio/private lenders**: 1.20-1.25 minimum. **Institutional DSCR lenders** (Visio, LendingOne): 1.15-1.25. **Bank statement programs** (alternative doc): 1.10-1.20. **0.75-0.99 DSCR lenders** (CoreVest, Kiavi): 0.75 minimum, rates 9-11%, 25-30% down.

**DSCR loan definition**: **No-income-verification investment property loans** that qualify borrowers **based solely on rental property cash flow** (DSCR ratio), **not personal income, W-2s, or tax returns**.

Ideal for: Self-employed investors (whose tax returns show low income due to write-offs).

Foreign nationals (no U.S. income documentation).

High-income W-2 earners at DTI limit (adding another property exceeds 43% DTI).

Full-time real estate investors (portfolio of 5+ properties). **How DSCR loans differ from conventional investment loans**: **Conventional**: Require personal income verification (W-2s, tax returns, paystubs).

DTI limit 45-50% (all debts + new mortgage).

Rental income counted at 75% (Fannie Mae).

Limit 10 financed properties. **DSCR**: **No income verification** - lender only reviews property rent vs mortgage. **No DTI calculation** - your other debts ignored (car loan, credit cards don't matter).

Rental income counted at **100%** (if DSCR ≥1.0). **Unlimited properties** (no 10-property cap). **2025 DSCR loan qualification requirements**: **1.

DSCR ratio minimum**: **1.20-1.25** for best rates (most common requirement). **1.15-1.19** accepted by some lenders (rate +0.25-0.5%). **1.00-1.14** available (rate +0.5-1%, 25-30% down). **0.75-0.99** (negative cash flow accepted, rate +1-2%, 30% down, cash reserves required). **2.

Credit score**: **Minimum 620-640** (most lenders). **660-679**: Standard rates. **680-699**: Rate discount -0.125%. **700-739**: Rate discount -0.25%. **740+**: Best rates (-0.375%). **3.

Down payment**: **20-25%** standard (80% LTV max). **15% down** (85% LTV) available for **DSCR ≥1.30** + 700+ credit score. **30% down** (70% LTV) required for **DSCR 0.75-1.0**. **4.

Cash reserves**: **6 months PITI** (principal, interest, tax, insurance) required.

Example: $2,500/month PITI → $15,000 reserves minimum. **5.

Property type**: **Single-family**, **2-4 unit multifamily**, **condos** (warrantable), **townhomes**. **Not allowed**: Non-warrantable condos, co-ops, mixed-use, vacant land. **6.

Property condition**: **Must be rent-ready** - lenders don't allow fix-and-flip properties.

Light cosmetic work OK, but no major rehab (roof, foundation, HVAC replacement). **7.

Occupancy**: **Investment property only** - cannot be primary residence or second home.

Must have current lease or appraisal showing market rent. **8.

Loan limits**: **Minimum loan**: $75,000-$100,000 (varies by lender). **Maximum loan**: $3M-$5M (portfolio lenders go higher).

Conforming limit doesn't apply (DSCR loans are non-QM). **DSCR loan rates and costs (2025)**: **Interest rates**: **DSCR 1.25+, 740 credit, 20% down**: 7.25-7.75%. **DSCR 1.20-1.24, 680-739 credit**: 7.50-8.00%. **DSCR 1.00-1.19, 660-679 credit**: 8.00-8.75%. **DSCR 0.75-0.99, 640-659 credit**: 8.75-10.00%. **Rate comparison**: Conventional investment loan (with income verification): 6.75-7.25% (0.5-1% lower than DSCR). **Origination fees**: 1-2 points (1 point = 1% of loan amount).

Example: $300k loan = $3,000-$6,000 origination fee. **Prepayment penalty**: Many DSCR loans have 3-5 year prepayment penalty (stepped: Year 1 = 5%, Year 2 = 4%, Year 3 = 3%, Year 4 = 2%, Year 5 = 1%, Year 6+ = 0%).

Some lenders offer no-penalty option (rate +0.25%). **DSCR loan approval process**: **1.

Pre-qualification** (same day): Lender reviews credit score, property address/rent estimate, down payment available.

Soft credit pull. **2.

Submit application** (1-3 days): Provide: Personal info (no income docs).

Property details (address, purchase price OR current value if refinance).

Lease agreement (if tenant in place) or appraisal rent estimate.

Bank statements showing down payment + reserves. **3.

Appraisal ordered** (7-10 days): Appraiser provides: Market value.

Rental income estimate (market rent).

Property condition. **4.

Underwriting** (5-7 days): Lender calculates DSCR using appraisal rent.

Verifies cash reserves.

No income/employment verification. **5.

Clear to close** (2-3 days): Title work completed.

Final walkthrough (if purchase). **6.

Closing** (30-45 days total from application). **Example DSCR loan scenario (2025)**: **Borrower**: Self-employed (1099 contractor), $150k actual income but tax returns show $60k (after business write-offs).

Conventional lender rejects (DTI too high based on $60k income). **Property**: $350,000 single-family rental.

Rent: $2,600/month ($31,200/year).

Expenses: $10,800/year.

NOI: $20,400. **DSCR loan structure**: Down payment: 25% ($87,500).

Loan amount: $262,500.

Rate: 7.75% (DSCR loan).

Term: 30 years.

Monthly P&I: $1,888.

Annual debt service: $22,656. **DSCR**: $20,400 ÷ $22,656 = **0.90** (below 1.0). **Lender adjustment**: Increase down payment to 30% ($105k down).

Loan amount: $245,000.

Monthly P&I: $1,760.

Annual debt service: $21,120. **New DSCR**: $20,400 ÷ $21,120 = **0.97** (still below 1.0, but some lenders accept).

Rate: 8.50% (higher for <1.0 DSCR). **Cash reserves required**: $1,760 + $750 tax + $150 insurance = $2,660/month PITI. 6 months = **$15,960 reserves** after closing. **Best DSCR lenders 2025**: **Portfolio lenders**: Visio Lending (0.75 min DSCR), LendingOne (1.0 min), CoreVest (1.0 min), Kiavi (1.0 min). **Private/hard money**: Local portfolio lenders (often better rates for local investors). **Pros vs cons**: **Pros**: No income verification.

Unlimited properties.

Faster approval (no tax returns).

Great for self-employed/foreign nationals. **Cons**: Higher rates (+0.5-1.5% vs conventional).

Prepayment penalties.

Requires strong property cash flow (DSCR ≥1.20).

Higher down payment (20-30% vs 15% conventional).