What is a DSCR loan?

What the ratio means

• Above 1.25. Comfortable coverage. This range tends to bring the best pricing.
• 1.00 to 1.25. The rent covers the payment. Most programs accept it, and pricing can be a little higher.
• Below 1.00. The rent does not cover the payment. A few programs allow it with a larger down payment and extra reserves.

What lenders look at

Because your income is not the focus, the file centers on four things.

• The property. Its value, its condition, and its rent, confirmed by an appraisal.
• The loan size. The loan-to-value ratio, which is usually capped at 75 percent.
• Your credit. Most programs start at a 620 score. Higher scores bring better terms.
• Your reserves. Cash left after closing, usually counted in months of payments.

When a DSCR loan makes sense

These loans earn their keep when conventional financing gets in the way. That is often true for self-employed investors with heavy write-offs, for people who already own several mortgaged properties, and for buyers who want to hold property in an LLC. It also helps when speed matters, since a short file closes faster than a full income review.

Trade-offs to weigh

A DSCR loan costs somewhat more than a conventional mortgage. Rates run higher, and many loans carry a prepayment penalty for the first few years. They are also limited to investment property. You cannot use one for a home you plan to live in.

The right question is not whether the rate is the lowest. It is whether the deal still works at that rate. If it clears a healthy ratio, the loan did its job.