Could a DSCR Loan Help You Get Into The Short Term Rental Market?
DSCR loans (Debt Service Coverage Ratio loans) are a type of business-purpose real estate loan used primarily by real estate investors. Unlike traditional mortgages, which focus on the borrower’s income and debt-to-income ratio, DSCR loans are based on the income potential of the property itself.
What Is DSCR?
DSCR = Net Operating Income (NOI) / Debt Service
- Net Operating Income (NOI): Rental income minus operating expenses (not including loan payments).
- Debt Service: Annual mortgage payments (principal + interest).
Example:
If a property generates $60,000/year in NOI and your annual loan payments are $48,000:
DSCR = $60,000 / $48,000 = 1.25
A DSCR of 1.25 means the property earns 25% more than its debt obligations, which is a typical lender minimum.
How DSCR Loans Work (Step-by-Step)
1. Find a Cash-Flowing Property
- Single-family, multifamily, short-term rentals (Airbnb), or commercial real estate.
- Lenders prefer properties with strong rental history or high projected income.
2. Apply for the DSCR Loan
- Unlike conventional loans, your personal income, W-2s, or tax returns are usually not required.
- Instead, lenders look at:
- Property’s actual or projected income (via leases or STR data)
- Market rents (if newly purchased)
- Operating expenses and property taxes
- Appraisal and rent schedule
3. Loan Approval Based on DSCR
- Most lenders require a minimum DSCR of 1.00 to 1.25.
- Lower DSCR = higher risk = higher interest rate or down payment.
- You typically need:
- 20%–30% down payment
- 640–700+ credit score
- LLC or business entity preferred (but some lenders allow personal name)
4. Loan Terms
- Loan-to-Value (LTV): Up to 80%
- Interest Rates: Higher than conventional (e.g., 7–10% in many markets)
- Term: 30-year fixed or interest-only periods (5, 7, 10 years)
- Prepayment Penalties: Often apply, especially in the first 3–5 years
Best Uses for DSCR Loan
- Short-term rental properties (Airbnb, VRBO)
- Out-of-state or passive investments
- Portfolio expansion without showing tax returns
- Self-employed or investors who can’t qualify traditionally
Example DSCR Calculatio
| Item | Amount |
|---|---|
| Monthly Rent | $2,500 |
| Operating Expenses | $500 |
| Monthly Mortgage Payment | $1,500 |
| Net Operating Income (NOI) | $2,000 |
| Annual NOI | $24,000 |
| Annual Debt Service | $18,000 |
| DSCR = 24,000 / 18,000 | 1.33 |
A DSCR of 1.33 would typically qualify easily.
Pros and Cons
Pros:
- No income verification
- Great for full-time investors
- Works for short-term and long-term rentals
- Faster closings than conventional
Cons:
- Higher interest rates
- Requires significant down payment
- Limited cash-out options
- Some lenders require high DSCR (1.25+)
Summary
| Feature | DSCR Loan |
|---|---|
| Based On | Property’s cash flow |
| Min. DSCR | 1.00–1.25 |
| Income Verification | Not required |
| Best For | Real estate investors |
| Loan Types | Purchase, refi, cash-out |
| Typical Term | 30-year, interest-only options |
If you have experience acquiring a DSCR loan, please share with us about the process!
The content on this blog is for informational purposes only and does not constitute professional advice. Always consult a qualified expert before making financial, legal, or property-related decisions. I am not liable for any actions taken based on the information shared on this site.
