If you’re a real estate investor looking to expand your rental property portfolio, securing the right financing is crucial. Traditional mortgage lenders often focus on personal income, which can make it difficult for self-employed investors or those with multiple properties to qualify for loans.
Debt Service Coverage Ratio (DSCR) loans provide an alternative financing solution that evaluates the property’s ability to generate income rather than relying on your personal income statements or tax returns.
In this guide, we’ll break down everything you need to know about DSCR loans, including how they work, their advantages and disadvantages, qualification requirements, and how to apply for one.
What is a DSCR Loan?
A DSCR loan (Debt Service Coverage Ratio loan) is a type of mortgage designed for real estate investors. Instead of assessing your personal income, lenders evaluate the rental income of the property to determine whether it can cover the loan payments.
This makes DSCR loans ideal for investors who own multiple properties, self-employed individuals, and those who want to avoid the hassle of traditional income verification.
Who Can Benefit from a DSCR Loan?
- Real estate investors who want to purchase or refinance rental properties
- Self-employed individuals or those with complex income streams
- Investors who want to qualify without tax returns or W-2 income
- Property owners looking to scale their portfolios faster
How Does a DSCR Loan Work?
Unlike conventional mortgages that require employment verification, tax returns, and personal debt-to-income (DTI) ratios, DSCR loans focus on a property’s ability to generate sufficient rental income to cover its debt obligations.
Lenders analyze Debt Service Coverage Ratio (DSCR) to determine loan eligibility.
How Is DSCR Calculated?
The formula to calculate DSCR is:
Where:
- Net Operating Income (NOI) = Rental Income – Operating Expenses
- Total Debt Payments = Principal + Interest + Taxes + Insurance
DSCR Calculator
What Is a Good DSCR Ratio?
Lenders typically look for a DSCR of at least 1.2 to 1.5, meaning the property generates 20% to 50% more income than its debt obligations.
- 1.25 or higher – Strong financial standing, preferred by lenders
- 1.0 – 1.24 – Possible approval but with higher interest rates
- Below 1.0 – Risky investment, likely to be rejected unless additional assets or down payments are provided
A higher DSCR means a lower risk for lenders and can result in better loan terms, lower interest rates, and higher borrowing limits.
Pros and Cons of DSCR Loans
| Pros of DSCR Loans | Cons of DSCR Loans |
| ✔ No Personal Income Verification – Approval is based on the property’s cash flow, not your job or tax returns. | ❌ Higher Interest Rates – DSCR loans typically have higher rates than conventional mortgages due to the increased lender risk. |
| ✔ Faster Loan Processing – Less paperwork speeds up approvals. | ❌ Larger Down Payments – Most lenders require at least 20% down. |
| ✔ No Limit on Property Count – Unlike traditional mortgages, investors can finance multiple properties. | ❌ Strict Cash Flow Requirements – Your property must show sufficient rental income to qualify. |
| ✔ Great for Self-Employed Borrowers – No W-2s or complex tax filings required. | ❌ Limited Lender Availability – Not all banks and lenders offer DSCR loans, meaning you may need to work with specialized lenders, which could limit your options. |
| ✔ Ideal for Rental Properties & Short-Term Rentals – Works well for Airbnbs, vacation rentals, and commercial real estate. | ❌ Prepayment Penalties May Apply – Some DSCR loans include prepayment penalties, making it costly to refinance or pay off the loan early. |
How to Qualify for a DSCR Loan
To secure a DSCR loan, lenders generally require:
Minimum Requirements
- ✅ DSCR of 1.2 or higher (1.5+ preferred for better rates)
- ✅ Credit score of at least 660 (higher scores get better terms)
- ✅ Down payment of 20% – 25%
- ✅ Sufficient rental income to cover loan payments
- ✅ Cash reserves covering at least 6-12 months of mortgage payments
Property Eligibility
✔ Single-family rental homes
✔ Multi-family properties (duplexes, triplexes, apartment buildings)
✔ Commercial real estate (shopping centers, office buildings)
✔ Vacation rentals & Airbnb properties
The property condition must be good and meet lender guidelines.
How to Apply for a DSCR Loan
Applying for a DSCR loan is a straightforward process compared to conventional mortgages. Here’s how to get started:
Step 1: Find a DSCR Loan Lender
Not all lenders offer DSCR loans, so work with a specialized lender like eFunder Capital that understands investment property financing.
Step 2: Calculate Your DSCR
Use a DSCR loan calculator to ensure your property meets the required ratio.
Step 3: Submit Required Documents
Lenders will ask for:
✔ Property rental income statements
✔ Loan application forms
✔ Down payment proof
✔ Property appraisal
Step 4: Get Approved & Lock in Your Rate
Once approved, review your loan terms and lock in your interest rate to secure the best deal.
Step 5: Close the Loan & Receive Funding
Upon closing, funds will be disbursed, allowing you to purchase or refinance your investment property.
Frequently Asked Questions (FAQs) About DSCR Loans
1.Do DSCR loans have higher interest rates?
Yes, DSCR loan rates are generally higher than conventional mortgages but lower than hard money loans. The exact rate depends on your DSCR ratio, credit score, and loan terms.
2.Can I refinance a DSCR loan?
Yes! Refinancing a DSCR loan can help lower interest rates, free up cash, or adjust loan terms.
3. Are DSCR loans only for real estate investors?
Yes, DSCR loans are designed specifically for rental property investors and are not intended for primary residences.
4. What is the minimum down payment for a DSCR loan?
Most lenders require at least 20% down, though some may ask for 25%-30% depending on the risk factors.
Is a DSCR Loan Right for You?
DSCR loans offer a powerful financing option for real estate investors who want to grow their portfolios without traditional income verification.
By focusing on rental income rather than personal earnings, these loans provide flexibility and allow investors to qualify based on property performance rather than paychecks.
If you’re ready to scale your rental portfolio, apply for a DSCR loan today with eFunder Capital and get expert guidance on securing the best loan terms.
