Concept
DSCR Loan
What it is
A DSCR loan — short for Debt Service Coverage Ratio — is a mortgage underwritten on the property’s rental income rather than your personal income. The lender doesn’t ask for pay stubs or tax returns. They calculate the ratio of monthly rent to the monthly payment (principal, interest, taxes, insurance). A DSCR of 1.0 means rent exactly covers the payment. Most lenders want somewhere north of that.
These loans are all over the place now. They close in an LLC or personal name, fund in a few weeks, and do not count against Fannie Mae’s 10-mortgage personal limit. That last part is the whole reason they exist.
Why it matters
Conventional lending has a hard cap, and the qualification math gets harder after the first few properties as your debt-to-income stacks up. DSCR breaks that ceiling. I hit a point where my credit was wrecked — ran up every credit card on a project I thought would sell for $800K, ended up losing $150K — and I still needed to keep buying. DSCR was what let me do it. Even with bad credit, I was able to get DSCR loans based on the value of the property, not the value of the borrower. That’s from the how-I-became-a-millionaire story and it’s the real deal.
The other use is the back end of BRRRR. Buy with cash or hard money, rehab, lease up, then refinance with a DSCR loan at 75-80% of the new appraised value. The refi pulls your original capital back out — and that cash is debt, not income, so you don’t pay taxes on it. That’s the cycle that lets you buy more properties without adding fresh cash to every deal.
How it shows up
For a rental in a B-class neighborhood, you need the rent to cover the payment. Run the math before you celebrate a DSCR approval. Lenders look at gross rent; they don’t factor in property management, capex, or vacancy. A property that shows fine on the DSCR calculation might not be worth the buy once the 31 percent rule eats into the gross.
The DSCR lender doesn’t care where the down payment came from, doesn’t care how many LLCs you own, doesn’t care whether you have a W2. What they care about is whether the rent covers the payment. For investors, that’s honestly the most honest form of real estate lending — it prices the deal on the deal.
On the refinance side: take those three $300K rentals with $240K loans on each. After five years at market appreciation, you can do a cash-out refi, pull $200K out, put it in your bank account, and not pay a dime in taxes. Debt is not income. That’s the power of DSCR on the hold side.
Related
refinance, hard money, brrrr, 31 percent rule, cash flow, exit strategy, equity looting