What is a DSCR Loan? #
A DSCR loan is a type of real estate investment loan where the borrower’s ability to qualify is based on the income generated by the property itself, not their personal income.
“DSCR” stands for Debt Service Coverage Ratio, a financial metric that measures a property’s ability to produce enough income to cover its debt obligations.
Debt Service Coverage Ratio is one of the most important numbers in real estate lending. It tells both you and the lender whether a property earns enough income to cover its housing expenses.
Understanding how this ratio is calculated gives you a clearer picture of how lenders decide if a property qualifies for financing.
The DSCR Formula #
Most residential DSCR lenders keep it simple. They take the property’s gross rental income and divide it by the PITIA—which stands for Principal, Interest, Taxes, Insurance, and Association fees.
By using PITIA instead of just the mortgage payment, lenders make sure they are accounting for all of the major monthly costs tied to the property.
Example Calculation #
Say a rental property brings in $5,000 each month and the PITIA totals $4,000. The calculation would be:
$5,000 ÷ $4,000 = 1.25
A DSCR of 1.25 means the property generates 25 percent more income than is needed to cover all monthly housing costs.
Why DSCR Matters for Investors #
- A DSCR of 1.0 means the property is breaking even, with income just covering expenses.
- A ratio above 1.25 is generally considered strong cash flow and can often help you secure better terms.
- A ratio below 1.0 means the property is losing money each month, which usually makes it ineligible for financing.
- Since lenders use PITIA, it is important to factor in more than just principal and interest when running your own numbers.
Summary #
DSCR loans are designed to make it easier for real estate investors to secure financing based on the strength of their investment, rather than their personal financial profile.
This is particularly useful for self-employed individuals, business owners, or anyone with non-traditional income who wants to scale a rental portfolio.
DSCR is calculated by dividing Net Operating Income by Debt Payments. It shows how comfortably a property can cover its loan obligations and serves as a cornerstone for real estate lending decisions.