DSCR Loans Explained

Traditional investment property financing looks at your tax returns, your existing mortgages and your total debt load. That works well until you own several properties or write off enough on Schedule E that your paper income no longer supports another loan. DSCR financing was built for exactly that point.

How the ratio works

DSCR stands for Debt Service Coverage Ratio. The lender compares the property's monthly rent to its full monthly obligation, usually principal, interest, taxes, insurance and any HOA dues.

Most programs look for a ratio at or above 1.00, and pricing usually improves as the ratio rises. Some investors qualify below 1.00 with a larger down payment, but terms tighten.

What lenders review instead of income

• Credit score, which drives both eligibility and pricing
• Down payment or equity position, commonly 20% to 25% on a purchase
• Reserves, often several months of payments left after closing
• The lease or an appraiser's market rent opinion
• Property condition and type, including two to four unit properties and some condos

Where DSCR fits in Northeast Ohio

Rent to price ratios across Akron, Canton and parts of Cleveland often produce workable coverage ratios, which is one reason investors from outside the region look here. Property taxes vary sharply by community, and because taxes sit inside the payment, they move the ratio directly. Two properties with the same rent and price can land on opposite sides of a program minimum because of the tax bill.

Costs to plan for

DSCR loans are not agency loans, so pricing, fees and prepayment terms are set by individual investors. Many carry a prepayment penalty for the first few years. Ask for those terms in writing early, especially if you plan to refinance or sell within a short window.

Program guidelines, ratios and pricing vary by lender and change over time. The figures above are illustrations, not an offer of terms.