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DSCR Loans — Purpose, Pros & Cons
Purpose
Approval based on property cash flow. Lenders evaluate the property’s Debt-Service Coverage Ratio (DSCR) to determine eligibility.
Formula: DSCR = Net Operating Income (NOI) / Total Debt on the property (includes taxes, insurance, mortgage, utilities, etc.).
A DSCR above 1.25 is typically preferred by most banks—meaning the property earns about 25% more than its operating and mortgage costs.
Some private lenders may offer DSCR loans at 0.75 DSCR on purchases (the property doesn’t have to be cash-flow positive) and at 1.00 DSCR (break-even) on refinances.
Pros
- Faster approval process.
- Easier access for investors with high debt-to-income ratios.
- Ability to finance multiple rental properties.
- Interest-only options available.
- Often better rates than traditional commercial financing.
- No personal income verification required (no tax returns, pay stubs, or W-2s).
- Popular for investors aiming to scale quickly without extensive personal income documentation.
- If you want to avoid a paperwork marathon on a rental purchase, DSCR loans can be a strong fit.
Cons
- Typically higher interest rates than conventional owner-occupied loans.
- Larger down payments often required (about 15%–25%).
- Loans must be made to a business entity (LLC, S-Corp, etc.).
- Limited to income-producing properties.
- Refinances must have a DSCR over 1.0%
- Purchases may have a DSCR of .75% if there are vacancies.
- Many DSCR lenders have a prepayment penalty which may be negotiated out with a slightly higher interest rate.
Note: Terms vary by lender and market conditions. This is general information, not financial advice.
