DSCR Loan Program,
DSCR Mortgage Program

DSCR Loan Program and DSCR Mortgage Program:
What are they, and where do i start?

Real estate investors are always searching for wiser ways to build their wealth, and Debt Service Coverage Ratio (DSCR) loans are one way to do that. Whether you’re new to property investment or you’re a seasoned connoisseur, a DSCR loan can help you build a real estate portfolio or diversify further into the market.

In a nutshell, the DSCR mortgage program allows you to secure your loan based on the rental income forecasts the proposed property will generate, rather than the personal income standards that most mortgage lenders use. That’s right: no longer is a borrower’s ability to front up mortgage payments limited to the fruits of their day job!

In this article, we’re going to talk about the finer points
of the DSCR loan and how you may be able to secure
one for yourself.

What is a debt service coverage ratio loan?

To answer this question, let’s first look at what a DSCR loan is not. Qualified mortgage loans are government-backed or privately-backed loans that require the borrower to comply with certain income verification standards and financial benchmarks. Usually, these standards include a number of measures, including an individual’s pay grade. A DSCR loan is not the same as a qualified mortgage loan.

Instead, DSCR is a calculation that allows a borrower to qualify for a mortgage based on the cash flow generated by a property. This may come from rental income, for instance. By comparing an investment property’s net operating income (NOI) to the mortgage debt value, financial institutions can determine whether the real estate asset will generate sufficient funds to cover the lender’s proposed debt service.

If you’re looking for a great income-generating property investment and you have a solid investment plan in place, you may be able to qualify for a DSCR mortgage to get you started. The Mortgage Shop, LLC is a team that specializes in finding the right loan programs for real estate investors who prefer the flexibility of long-term or short-term rentals. If you think a DSCR loan is a good option for your real estate property investment, get in touch with the mortgage experts at The Mortgage Shop, LLC today.

How is DSCR Calculated?

The DSCR is a ratio of a property’s annual NOI and its yearly mortgage debt. Calculations can vary from lender to lender, but you can use the following DSCR formula as a general guideline:

For example, let’s say Johnny has found a profit-generating short-term vacation rental and wants to get a DSCR mortgage. The investment property’s NOI is $40,000, and the annual debt obligation is $32,000. Let’s plug in the numbers:

$40,000 / 32,000 = 1.25

Johnny’s DSCR is 1.25, which means the property’s positive cash flow is 25% greater than what is required to pay off his annual debt. When a lender uses this calculation, they quickly understand whether the investment will produce enough cash flow to cover the debt service. The DSCR ratio helps them determine the risk associated with lending.

Financial institutions have tailored approaches to researching and forecasting a property’s projected rental income, and each may factor additional information they deem necessary to weigh the risk. Other requirements may need to be approved to qualify for a DSCR mortgage, but this tool is helpful for lenders and investors alike.

What are the requirements for DSCR Loans?

Lenders will have individual requirements that dictate whether or not you qualify for a DSCR loan. It’s best to discuss with your preferred lender to understand the loan terms and conditions. That said, here are a few general guidelines that most lenders will look for.

The property's debt service coverage ratio

A DSCR is a measurement tool that determines whether the chosen investment will produce enough income to cover the suggested debt obligation. A DSCR of 1.0 or above is known as a breakeven point and means that the property is sufficiently profitable to finance the debt on its own. If the DSCR is less than 1.0, it indicates that the property will not generate enough income to pay off the proposed debt.

The higher your ratio, the less risk is associated with the investment from a lender’s point of view. Individual lender requirements can vary, but typically investors who want to secure a DSCR mortgage need to have a ratio of at least 1.0.

Your down payment

Depending on the financial institution, you’re usually required to have a 20-25% down payment on the property. If you have a larger chunk of your wealth that you’re willing to put into real estate, this may even allow you to purchase several properties at once if you choose. As all investors know, this opens the door to greater positive cash flow and may even be a fast-track to meeting your financial goals.

For investors who do not currently have a nest egg to cover the down payment, the best way forward is to keep diligently saving until you do and to speak with the experts about alternative options to secure your next investment property.

Getting a DSCR Loan:
Pros and Cons

As with anything, there are positives and negatives associated with debt service coverage ratio programs. Some of these may be weighted more heavily depending on your short-term and long-term financial goals, as well as your plans for the investment property.


No! This loan specifically goes off the property you are purchasing’s proposed rental income, and the proposed monthly PITIA. Most lenders require a 1:1 ratio which means, if your monthly PITIA is 3,000.00 then your proposed monthly rent needs to be 3,000.00 or more.

Yes! Keep in mind that you still are the personal guarantor, but this will allow you to close in an LLC.
Typically no however, if you default on payment, it will show on your credit report.
Depending on the lender, it could or it may not. However, we have a fancy way of seeing all properties you have titled under your name and will require documentation on the loan and have to manually add it in if it doesn’t show on your credit report. This would only matter if you did a DSCR loan and then went back and got another conventional loan.

Final Thoughts

For new and seasoned investors, the DSCR program can prove extremely valuable for financing your next real estate investment. No longer do lenders require pay stubs and tax returns to determine whether you qualify. Now, investment properties can be purchased with DSCR loans, provided the asset’s income coverage is enough to pay off the debt obligation.

If you’re a real estate investor who wants to grow your investment portfolio with a DSCR program, The Mortgage Shop, LLC is here to offer you sound advice and support through your journey. Our experienced team will guide you into your next real estate investment with the best loan to help you meet your financial goals. Contact The Mortgage Shop, LLC to learn more today.

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