How the ratio works
DSCR stands for debt service coverage ratio. Divide the property’s monthly rent by its full monthly payment — principal, interest, taxes, insurance and any HOA dues:
Rent of $3,000 against a total payment of $2,500 is a ratio of 1.20: the rent covers the payment with 20 percent to spare. At 1.00 it exactly breaks even. Below 1.00 the rent does not cover it.
The rent comes from an existing lease, or for a vacant or newly bought property, from the appraiser’s estimate of market rent.
A higher ratio generally earns better pricing and more flexibility. Some lenders will go below 1.00, and some offer a no-ratio version for properties where the rent doesn’t cover the payment at all — at a price, and usually with a larger down payment.
What it does for an investor
- No personal income documentation. No tax returns, no pay stubs, no debt-to-income ratio. The write-offs that make your returns look thin stop mattering.
- It scales. Each property qualifies on its own rent, so the fifth property is not harder than the first the way it is on a conventional loan.
- Cash-out on a property you already own, to fund the next one.
- Assets can help. Some lenders will combine the rent with your assets for a better loan-to-value than the ratio alone would get.
Why it works differently
Credit to buy, improve or maintain a rental property you do not live in is, under federal rules, business-purpose credit.1 That takes it outside the Truth in Lending Act — including the ability-to-repay rule that governs the loan on your own home.1
That is what lets the lender ignore your income. It also means some protections you would have on a home loan are not there, and you have to look after them yourself.
A home loan you live in can rarely carry a prepayment penalty, and an owner-occupied non-QM loan cannot carry one at all.2 A DSCR loan can, and most do. It is often how the rate got as low as it did.
That is not a reason to refuse one — if you plan to hold the property for years, the lower rate can be worth it. It is a reason to know the structure before you sign. What they look like and what to ask.
When a conventional loan is cheaper
If your tax returns show enough income to qualify, a conventional investment loan will usually cost less than a DSCR loan, even after Fannie Mae’s investment property adjustment. DSCR earns its price when your returns won’t carry the loan, when you are adding properties faster than your income can keep up, or when you would rather not hand over your finances for every purchase. We price both.
Sources
These references support the factual explanations above. Where this page states a preference rather than a fact, it says so — those are our editorial judgement, not a claim that any one channel always costs less.
Next
Prepayment penalties on non-QM and DSCR loansYour home loan almost certainly cannot have one. Your investor loan almost certainly does.Investment properties and second homesWhat separates the two, the down payment each needs, and why both cost more than a home you live in.Bring us the file that doesn’t fit
Tax returns that undersell you, a rental portfolio, an ITIN, a thin credit file. Tell us what you have. We will look at whether a conventional loan works before we look at a non-QM one, and tell you plainly which is cheaper.