Question 1

What is a DSCR loan?

Accepted Answer

A DSCR (Debt Service Coverage Ratio) loan is a type of non-QM real estate investment loan that qualifies a borrower based on the property's rental income rather than the borrower's personal income. Instead of requiring W-2s or tax returns, the lender compares the rental income to the property's debt obligations to confirm the investment cash-flows.

Question 2

Why is a DSCR loan different?

Accepted Answer

DSCR loans are different because they focus on the property's ability to cover its debt rather than the borrower's personal income or employment. This makes them ideal for real estate investors who may have complex tax situations, own multiple properties, or write off expenses that lower their qualifying income on paper.

Question 3

What is the DSCR ratio?

Accepted Answer

The DSCR ratio is the property's gross rental income divided by its total monthly debt obligations (principal, interest, taxes, insurance, and HOA if applicable). For example, if a property generates $2,500/month in rent and the total housing payment is $2,000, the DSCR is 1.25.

Question 4

Are DSCR loans 30 year fixed loans?

Accepted Answer

DSCR loans are commonly offered as 30-year fixed-rate mortgages, though other terms are available, including 40-year amortizations and adjustable-rate options. The 30-year fixed is the most popular because it keeps payments predictable and maximizes cash flow.

Question 5

Are escrows required for a DSCR loan?

Accepted Answer

Escrows for taxes and insurance are typically required on DSCR loans, though they can sometimes be waived with a small fee or higher rate. Because these loans are investor products, requirements vary by lender and property type.

Question 6

What is the minimum required DSCR ratio?

Accepted Answer

Most DSCR lenders require a minimum ratio of 1.0, meaning the rental income must at least equal the debt payment. Many programs offer better pricing at 1.20 or 1.25, and some lenders allow ratios as low as 0.75 with a rate premium.

Question 7

What if my DSCR ratio is under 1?

Accepted Answer

If your ratio is under 1.0, the property is not fully covering its debt with rent alone. Some lenders still offer financing with a 'negative DSCR' option, but you'll typically pay a higher rate, need a larger down payment, or qualify the deal with additional reserves.

Question 8

How high a credit score do you need?

Accepted Answer

Most DSCR programs require a minimum middle credit score of 660-700, with the best rates generally starting around 720+. Requirements can vary by lender, loan amount, and whether the property is a single-family or multi-unit investment.

Question 9

If I have a business partner, whose score do you use?

Accepted Answer

When two partners are on a loan, most DSCR lenders use the lowest qualifying credit score among all borrowers. Some programs allow one borrower to be removed from credit qualification for a pricing adjustment.

Question 10

Can you use a DSCR loan for a primary residence?

Accepted Answer

No. DSCR loans are designed strictly for investment properties — non-owner-occupied rentals, including 1-4 unit residential rentals and some multi-family or mixed-use properties. They cannot be used for a primary residence.

Question 11

Can you do a cash-out refinance with a DSCR loan?

Accepted Answer

Yes. Cash-out refinancing is allowed on DSCR loans, letting investors pull equity out of an existing rental property. LTV limits and seasoning requirements vary, but cash-out is a common use case for investors scaling their portfolio.

Question 12

Do I need a job or current tax returns for a DSCR loan?

Accepted Answer

No. One of the biggest advantages of a DSCR loan is that personal income, employment, and tax returns are not used to qualify. The property's rental income and your credit are the primary factors.

Question 13

Can I finance an apartment building with a DSCR loan?

Accepted Answer

Yes, in many cases. DSCR loans can finance small multi-family properties (5+ units) and some apartment buildings, depending on the lender's program. Larger commercial apartment buildings may fall under a separate commercial DSCR or agency product.

Question 14

Can I refinance a flip that is not selling with a DSCR loan?

Accepted Answer

Yes. If a flip isn't selling, many investors refinance into a DSCR loan, place a tenant, and convert it into a long-term rental. As long as the property cash-flows and meets the DSCR requirement, this is a viable exit strategy.

Question 15

Are there prepay penalties on DSCR loans?

Accepted Answer

Yes, most DSCR loans include a prepayment penalty, typically a step-down structure over the first few years (for example, 3 years at 3/2/1 or 5 years at 5/4/3/2/1). This is standard for non-QM investor loans and helps keep rates lower.

Question 16

What are prepay penalties?

Accepted Answer

A prepay penalty is a fee the borrower pays if the loan is paid off early — either by selling the property or refinancing — within a specified window. The fee usually decreases each year until it falls off entirely.

Question 17

What are the costs of prepay penalties?

Accepted Answer

Prepay penalties are usually calculated as a percentage of the outstanding loan balance. A 3/2/1 structure, for example, charges 3% of the balance in year one, 2% in year two, and 1% in year three, with no penalty after that period ends.

Question 18

Can I buy out the prepay penalty?

Accepted Answer

Some DSCR lenders offer a prepay buyout option — paying a slightly higher rate at closing in exchange for waiving the prepayment penalty. This is worth requesting if you expect to sell or refinance within the first few years.

Question 19

Can the property be vacant?

Accepted Answer

To qualify on a DSCR basis, the property generally needs a lease or market rent analysis showing it will cash-flow. A fully vacant property can sometimes qualify using market rent (subject to lender appraisal and seasoning), but an in-place lease strengthens the file.

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