DSCR Loan for
Investment Rental Properties

What is a DSCR loan?

A DSCR or “Debt Service Coverage Ratio” loan is a special type of loan that can be used to buy an income-producing rental property based on the property’s (prospective) income—without having to show how much income you make personally. “Debt service” is a fancy word that means “paying 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.

Qualifying for a DSCR loan

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

To calculate the income of the property, you take the gross income of the property and deduct all of the expenses. The expenses include management, repairs, property management, property taxes, insurance and property insurance. It could include a little bit of landscaping, and it would include water and power if this is not being paid by the tenants. It would also have an allocation for vacancies. It would include every single expense the property has. When all the expenses have been deducted from the gross income, you have the net operating income.

Once you have the net operating income, we compare it with how much money you will need to pay to the lender for the loan. For DSCR loans, 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 of net operating income.  And let's assume that on a yearly basis, what you need to pay to the bank in terms of principal and interest is $25,000.

That means that you are generating twice as much as what you need to pay to the bank.

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).

Most lenders do not require a DSCR of 2. Most lenders require a DSCR between 1.2 and 1.25 for commercial properties. In other words, they want your net operating income from the property to be between 20 to 25% more than what your payments to the lender would be. For residential properties, some lenders will go as low as 1.0, and they do not require you to account for vacancies and management fees.

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.

Other benefits of a DSCR loan

With a DSCR loan, there is no limit of properties you can have loans on, as long as the property can pay for itself. In general, you can buy as many properties as you can get your hands on and your income doesn't have to be used to qualify; the rental income of the property is used to qualify.

Another great aspect of the residential DSCR loan is this: the property does not have to be currently rented in order to prove rental income.

In order to determine the amount of rent the property can fetch, the lender will send an appraiser to the property, and if the property is vacant, then the appraiser will calculate what the units will rent for in that area, taking into account the condition the units are currently in. In other words, the appraiser is going to estimate the rental amount that each unit of the residential property can fetch, and the lender will use the estimated rentals, not the actual (because when the property is vacant, the actual rent is zero). The lender will take the estimated numbers by the appraiser, and that will be your qualifying income. So theoretically speaking, you can buy an investment property through a DSCR loan—a property that is completely vacant—and just use the estimated income in order to qualify.

At Prosperity Lending, we offer some of the most aggressive and best priced residential DSCR loans on the market. So whenever you’re thinking of buying an investment rental property, give us a call at 310-294-9417. We will take your information and send you a competitive quote.

“Thanks to the loan I got, I am expanding my business, and the future looks promising in ways I didn’t think possible.”

—Merilyn, Client