DSCR Loans: A Playbook From the Lender’s Side of the Table

TL;DR (Executive Summary)

• DSCR for SFR/2–4 is simple: Underwritten Gross Rent ÷ PITIA. Hit ≥1.10×–1.25× and life gets easier. For 5–10 units, many lenders switch to NOI ÷ Annual Debt Service — we still size 5–10 the same as 1–4 (Rent ÷ PITIA), then sanity‑check the operations.
• Income is usually the lower of market rent (1007/216 or 1025) or the lease. Vacant? No problem — we’ll use the appraiser’s market rent.
• IO matters. AHL offers 30‑year fixed and 40‑year fixed with the first 10 years interest‑only, and we qualify on the IO payment during the IO period. That alone can turn a borderline 1.13× into a 1.25×.
• Strategy beats coupon: bridge → stabilize → DSCR for heavy value‑add; direct‑to‑DSCR for turnkeys and light turns.
• Prepay, reserves, seasoning, and rate‑lock timing steer your exit options as much as the interest rate. Choose them on purpose, not by default.

We’ve seen thousands of DSCR files. The winners aren’t flashy; they’re prepared. Let’s make your next one a winner.

DSCR, demystified — how DSCR lenders actually size these loans

When an investor asks us, “What’s my max loan?” our team is really answering a quieter question: Does the rent comfortably carry the monthly payment today? Not after upgrades. Not after a perfect summer leasing season. Today.

Our working formula (SFR/2–4): DSCR = Underwritten Gross Rent ÷ PITIA (Principal + Interest + Taxes + Insurance + HOA).

Underwritten Gross Rent is the rent we’re willing to bet on. Most of the time it’s the lower of:

• Market rent from the appraiser’s 1007, or 1025 for 2–4 unit appraisals.
• The in‑place lease, if that number is lower than market.

Some programs shave market rent with a small vacancy factor; many do not. If there’s a haircut, your DSCR becomes (Rent × (1 − vacancy)) ÷ PITIA. We’ll tell you which bucket your deal lives in before you order the appraisal.

What sits inside PITIA: the monthly P&I (or IO, if your program qualifies on IO), plus taxes, insurance, and any HOA dues. These are the levers that quietly make or break borderline files. Taxes often reset after transfer; insurance is wildly zip‑code dependent in 2025; HOAs… well, read the minutes. Want to see how DSCR is calculated? Check out this calculator.

Why “lower of lease vs. market”? Because we underwrite to what’s defensible — the rent you can achieve in a normal turnover, not the rent your unicorn tenant pays today. If your lease is higher than market and you can document deposits at that level, we’ll review it. But the default is still sanity over optimism.

Appraisal tip from our side of the desk: The 1007 is your friend. It shows the rent comp set and adjustments. If you’re buying a duplex, triplex, or four‑plex, the appraiser will break out per‑unit rents; we’ll roll them up and apply program rules. Share any on‑point leases and photos with your appraiser — help them see what you see.

IO vs. amortized qualification: Some lenders qualify SFR/2–4 deals on the fully amortized payment, even if the note offers IO. AHL qualifies on the IO payment during the IO period. That difference is why the same property can be 1.13× with one lender and 1.25× with us.

What changes at 5–10 units: Many lenders pivot to a commercial, NOI‑based DSCR. We’ll unpack that in Section 7. Our twist: AHL still sizes DSCR for 5–10 units using Rent ÷ PITIA, and then we review ops (vacancy, management, reserves) so everyone walks in with eyes open.

Pre‑offer pencil test: check 1007 rent for the block, price taxes and insurance for post‑sale realities, compute PITIA at both IO and amortized, and run Rent ÷ PITIA. If a $25 HOA bump or a $600 insurance difference flips your deal, change something before you write the offer.

Income: market rent, leases, and the STR/MTR question

We underwrite to income we can defend on closing day. That starts with the lower of market rent (1007/216 or 1025) and the actual lease. If the home is vacant, we use the appraiser’s concluded market rent. Vacancies don’t scare DSCR lenders — uncertainty without data does.

A couple of useful wrinkles we see investors use well:

• Close calls between lease and market: If the appraiser’s market rent lands within shouting distance (call it ~20%) of the lease, many programs let us adopt the 1007/1025 figure as the underwritten rent without drama. It keeps files consistent across markets.
• Proving a higher lease: If your lease is above the 1007 and you can show two months of deposits at that level, some programs will let us lean on the lease. It’s not a promise — it’s a path, and the documentation has to be airtight.

What about STR/MTR? It’s the most program‑specific lane in DSCR. Many lenders default to long‑term market rent. Where STR/MTR is allowed, a common pattern is:

• Experienced STR (purchase or refi): up to 100% of documented STR income with 12 months of deposits into a verifiable account. Expect seasonality haircuts.
• No history (purchase‑only): ~75% of projected STR income supported by a 1007/market report from a reputable PM or analytics shop.
• Property‑type guardrail: for 5–10 units, most lenders won’t qualify on STR. Long‑term assumptions rule.

Takeaway: if your DSCR needs STR/MTR income to clear the bar, choose the program that counts it and bring the receipts. If not, pencil to LTR market and treat STR upside like gravy.

Expenses: the real DSCR killers live inside PITIA

For SFR/2–4, qualifying DSCR lives and dies on PITIA. The silent assassins:

• Taxes: reassessments after purchase can add real dollars. Underwrite to the post‑sale estimate.
• Insurance: quotes can jump zip to zip. Binders beat guesses.
• HOA: dues and special assessments belong in the “IA.” Read the minutes; ask the hard questions.

Do management and maintenance matter? For your cash flow, absolutely. For qualifying DSCR on SFR/2–4, most programs don’t impute them. For 5–10 units, many lenders will deduct management and reserves in a commercial NOI build — which is one reason AHL’s Rent ÷ PITIA sizing can support stronger proceeds on small MF.

The payment lever: interest-only (IO) vs. amortization (and how to use it)

IO lowers the denominator in Rent ÷ PITIA, which boosts DSCR and early cash flow. Amortization builds equity but raises the payment. You can have both: IO up front, then amortization.

AHL options: 30‑year fixed and 40‑year fixed, with the 40-year term coming with the first 10 years IO, and we qualify on the IO payment during that IO period. That single fact often moves a deal from “close, but no” to “clean pass.”

Quick example:

• Loan: $300,000
• Rate: 7.25%
• Taxes/Insurance: $4,200/yr
• HOA: $0
• Amortizing 30‑yr P&I: ≈ $24,552/yr; add T&I → $28,752/yr
• IO (yrs 1–10): interest $21,750/yr; add T&I → $25,950/yr

If underwritten rent = $32,400/yr: amortizing DSCR ≈ 1.13×; IO DSCR ≈ 1.25×. Same house. Different denominator.

Year‑11 reality check: payments recast. On 40‑yr IO you’ve got 30 years left. The 40‑year track smooths the step‑up and tends to keep DSCR friendlier if rents haven’t run.

How we coach borrowers: if you expect rent growth or an exit before year 11, 30‑yr IO is fine. If you want a gentler recast, 40‑yr IO is the calmer ride. Either way, model year 11 before you celebrate.

Term, structure, prepay — choose the note that matches your plan

Rate grabs headlines. Structure wins careers. Here’s how we help investors choose:

Fixed vs. ARM: fixed gives you sleep‑at‑night certainty. ARMs sometimes price better; just model the fully indexed payment (index + margin, bounded by caps) to see where your DSCR lands after the honeymoon. If your hold is ≤36 months and prepay allows it, an ARM can make sense. Otherwise, fixed is usually worth the premium.

40‑year amort + 10‑yr IO: this pairing exists to soften the post‑IO step. You’ll pay more total interest than a 30‑year, but your year‑11 math looks kinder. AHL offers both 30‑yr and 40‑yr fixed with 10‑yr IO — and yes, we qualify on IO during IO.

Prepayment penalty: step‑downs like 5‑4‑3‑2‑1 or 3‑2‑1 are common. Step downs and fixed prepays often price better than “prepay‑lite.” Match prepay to your plan. Selling or cashing out inside 24–36 months? Don’t hamstring yourself with a five‑year lock.

Points vs. rate (break‑even sanity check): if one point ($3,000 on $300k) buys you 0.25% and saves ~$40–$45/mo during IO, break‑even is ~67–75 months. If you’ll refi or sell sooner, keep your points and buy a nicer dishwasher. In amortizing years the savings are larger, so re‑check the math.

Assumability/portability: an assumable note can make your listing sparkle when rates are high. If it’s on the table, ask about fees, process, and whether the prepay clock resets.

Rate locks: many DSCR lenders don’t lock until the appraisal is in or you’re clear‑to‑close, and they charge for locks/extensions. AHL locks at origination for 45 days — free — once you sign and we order the appraisal. If you are floating elsewhere, start the lock only when the appraisal is scheduled and your insurance quote is real. A small paid extension beats letting a winning rate expire.

Reserves, liquidity, seasoning — the quiet gatekeepers

We love clean closings. The fastest path is knowing the gates:

• Reserves: expect 6–12 months PITIA at the property level (global liquidity tests for some). STRs may require more.
• Cash‑out seasoning: often 3–6 months from acquisition, with title docs and invoices. “Delayed financing” can shorten the path if you closed in cash — ask early.
• Rent seasoning: on multi‑unit stabilizations, some programs want one to three months of collected rent or signed leases at close.

Translate those into your project timeline so you’re not surprised at takeout.

SFR vs. small multifamily (≤10 units) — same game, sharper pencil

Moving from four units to five changes the underwriter’s toolkit. On 1–4 units, valuation is sales comps plus a rent schedule. On 5–10, the appraisal leans on the income approach — market rents → vacancy → normalized expenses → NOI → cap rate.

How commercial sizing works: underwriters start with market rents by unit type, subtract economic vacancy (often 5%–10%), then deduct management (5%–8% of EGI), owner‑paid utilities/repairs, taxes, insurance, and replacement reserves (often $250–$350/door/yr or a % of EGI). Other income (RUBS, parking, laundry) gets a prudent haircut. DSCR is NOI ÷ Annual Debt Service, and gateposts often sit at 1.20×–1.30×. Some programs add a debt‑yield test.

AHL’s approach: we still size 5–10 unit DSCR using Rent ÷ PITIA, exactly like we do for 1–4. Then we sanity‑check the ops so you’re not buying a problem with great pro forma. The practical effect: on strong small‑MF, our sizing can support better proceeds than a pure commercial NOI‑build.

What we expect to see:

• Stabilization: think ≥90% physical occupancy for 30–90 days with leases.
• Docs: a clean rent roll, a T‑12, and a utility matrix. If you rely on RUBS, show policy and history. No mystery units, no zoning drama.
• Terms: LTV bands can be a tad tighter on 5–10; prepay looks similar; sometimes we’ll set repair escrows for life‑safety items.

Bottom line: small MF rewards proof. Bring it, and we can be aggressive. Hide it, and we can’t.

Appraisal & documentation — what speeds your approval

Have this ready before the appraisal is ordered:

• Appraisal order info + 1007 Rent Schedule (SFR/2–4) or a commercial‑style appraisal scope for 5–10
• Form 216 (1–4 units) or equivalent cash‑flow schedule for small MF
• Leases (if in place) and estoppels as needed; full rent roll on multi‑unit
• Insurance binder, tax bill, HOA minutes/budgets (where applicable)
• Entity docs (LLC/Corp), EIN, operating agreement

Speed equals leverage. Clean files get clean approvals and better timing on locks.

Bridge → DSCR sequencing — win the takeout on day one

Bridge is a tool, not a lifestyle. Use it when the Appraisal Fairy needs to see the after story: heavy rehab, lease‑up, or a rent jump you can actually deliver.

How to not get stuck:

1. Underwrite the takeout on day one: what underwritten rent do you need so Rent ÷ PITIA ≥ your target DSCR at your target LTV? Put that number where you’ll see it.
2. Calendar math: if the bridge prepay burns for six months, your plan should stabilize in ≤ six.
3. Documentation: keep invoices, leases, before/after photos. Appraisers (and underwriters) love receipts.

Bonus: green upgrades that lower OpEx can raise DSCR. If you’ll hold the asset, those tweaks pay twice.

Pricing, LTV, and what actually moves your rate

Three big levers — and a fourth that’s sneaky:

• DSCR tier: every ~0.10× you add can improve price and approvals.
• LTV: lower leverage = better pricing, especially on cash‑out.
• Credit/asset type/purpose: these nudge, not dominate.
• Prepayment: deeper step‑downs often price better than prepay‑lite, but only buy what your timeline can use.

The mistakes we see most (and how to avoid them)

Underwriting taxes/insurance off the seller’s numbers
Why it hurts: reassessments and 2025 insurance can add $50–$300/mo to PITIA and blow DSCR after you’re in contract.
Fix: price post‑transfer taxes and get a binder before the appraisal. If DSCR < 1.10×–1.25× at those numbers, change something.

Skimming HOA docs
Why it hurts: special assessments and dues hikes live in those minutes.
Fix: read minutes/budgets, get the condo/HOA questionnaire, model dues + assessments in PITIA.

One‑bid underwriting
Why it hurts: scope miss → timeline drift → rate‑lock drama.
Fix: two bids per trade, milestone draws, 10% contingency, freeze scope after rough‑in.

Prepayment mismatch
Why it hurts: five‑year step‑down + 24‑month exit = penalties.
Fix: match prepay to hold. Flexibility costs points; sometimes that’s the right buy.

Rent optimism
Why it hurts: we qualify SFR/2–4 on Rent ÷ PITIA using the lower of lease vs. 1007/1025.
Fix: pencil to the lower‑of. If close, use IO, lower LTV, or pick a program that credits your income story.

Messy files
Why it hurts: conditions, delays, and lock risk.
Fix: clean packet: leases/rent roll, insurance quote, tax bill, entity docs, photos, HOA info. Label once. Upload once.

Forgetting the IO “year‑11” step
Why it hurts: payments recast; DSCR can slip.
Fix: model year 11 now. Prefer 40‑yr IO if you want a smoother step.

Assuming an early rate‑lock you don’t have
Why it hurts: many lenders lock late and charge for it.
Fix: confirm policy. AHL locks at origination for 45 days — free — once the appraisal is ordered.

Entity/vesting changes mid‑stream
Why it hurts: redraws and delays.
Fix: form the final entity first; keep the names consistent across contract, title, and app.

Seasoning/reserves blind spots
Why it hurts: can choke a cash‑out or lower proceeds.
Fix: map 3–6 months seasoning and 6–12 months PITIA reserves into your timeline.

Appraisal passivity
Why it hurts: the wrong comp set = the wrong rent/value.
Fix: hand your appraiser a rent/comp packet. Help them help you.

Counting STR/MTR without evidence
Why it hurts: many programs default to LTR rent.
Fix: bring 12 months of deposits (refi) or a credible PM/market report (purchase‑only). Or pencil to LTR.

Application checklist (speed = certainty)

• Entity docs (LLC/Corp, OA, EIN)
• Purchase contract or payoff statement (refi)
• Two months of bank statements (entity + borrower)
• Insurance quote/binder; tax bill (or assessor estimate)
• Leases/rent roll; any RUBS/other‑income evidence
• Scope/bids (if rehab) + photos; CO/permits where required
• HOA statements/budgets

Upload once, label clearly. Underwriters are people; people like neat.

Putting it all together

We’re lenders. We love math. But we lend to people running plans in markets that change. The DSCR playbook above is how we help our clients buy well, finance smart, and sleep at night. If the underwritten rent clears PITIA with room to breathe, the rest of the file is just logistics. If it doesn’t, you still have levers: buy deeper, re‑scope, use IO, lower LTV, or season income and come back with a bridge → DSCR victory lap.

When you’re ready, send us a real deal. We’ll run your numbers, stress‑test your takeout, and line up the structure that matches your plan — not the one on a generic rate sheet. Bring the property and a calendar. We’ll bring term sheets and snacks.

 

Frequently Asked Questions