What is a DSCR Loan?

 A DSCR (debt service coverage ratio) loan, or Investor Cash Flow loan, is a "Non-QM" loan that allows you to qualify for a home loan without relying on personal income.

DSCR loans are perfect for real estate investors who can secure a real estate loan based on their rental property’s cash flow, not their income tax returns or other financial paperwork. Here’s how a DSCR loan works and what it takes to qualify.

A conventional loan requires proof of income, usually in the form of tax returns or pay stubs. Alternatively, DSCR loans allow buyers to qualify for a mortgage based on their rental property’s cash flow.

Instead of using income to qualify a real estate investor for a loan, mortgage lenders will look at what is called a debt service coverage ratio or DSCR ratio. This ratio gives lenders insight into whether or not a borrower will be able to use the rental income from the property to cover their monthly loan payments.

In addition to the DSCR ratio, investors may also have to meet certain credit score requirements or even offer a down payment, though the exact requirements vary between lenders.

There is no limit to the number of DSCR loans you can qualify for. This means that investors who own multiple real estate properties can take out multiple loans to generate income from many tenants. This feature makes this a flexible option for beginner investors as well as seasoned real estate professionals.

To qualify for a DSCR loan, lenders require you to have a healthy DSCR ratio. This ratio relates the income of the property to its total debt, which influences the eligibility for the DSCR loan.

A good DSCR ratio is usually one or above, though lenders can be flexible depending on other criteria. To calculate your DSCR ratio, simply use the following DSCR formula:

DSCR = Monthly Rental Income / PITIA (Principal, Interest, Property Taxes, Homeowners Insurance & Association Dues)

DSCR loans are for investors in residential real estate rentals. They are a great option for anywhere from first-time investors to experienced investors with a large existing portfolio.

Investors can use DSCR loans to purchase additional income-generating properties, which makes this an ideal loan type for those looking to tap into additional revenue streams.