Loans Self-employed and investors DSCR loans
DSCR loans: qualify a rental on its rent
A DSCR loan qualifies a rental property on the rent it brings in rather than on your personal income. Lenders divide the rent by the full monthly payment; at 1.00, the rent just covers it.
New to this loan? Start here: DSCR loans for rental property A 3-minute lesson
Who it fits
Investors whose tax returns do not show enough income after depreciation and expenses, owners of several rentals, and buyers who want to close in an LLC. The property has to carry itself: the rent, not your paycheck, is what qualifies it.
What it costs, plainly
DSCR loans usually cost more than agency loans: a higher rate, a larger down payment and often a prepayment penalty. A conventional investment loan from Fannie Mae or Freddie Mac usually costs less when your tax returns show enough income. It asks for 15% down on one unit and 25% on 2 to 4 units, counts 75% of the rent and looks for 6 months of reserves.
A DSCR loan is still the right tool when your returns do not show enough income, when you own several rentals, or when you want to close in a business name. A loan for a rental you will not live in is business credit under federal rules, so many consumer mortgage protections do not apply. Read the note and any prepayment terms closely.
Where the rent figure comes from
- A rented property: the current lease, often checked against market rent.
- A vacant home or a purchase: the appraiser’s survey of market rent.
- Short-term rentals: some lenders use twelve months of booking history or a market data report, and others will not count it.
Some lenders use the lower of the lease and market rent, so rent above the market may not count.
In Southwest Colorado, short-term rental rules vary across our towns and counties. Some require permits, limit where short-term rentals are allowed or cap their number. Check the local rules before you count on short-term income, and know what the home would rent for long term.
Calculators and guides
Common questions
What DSCR do I need?
Many lenders look for 1.00 or higher, meaning the rent at least covers the full payment, and price better from about 1.20 to 1.25. Some accept a lower ratio with a larger down payment.
Can I use a DSCR loan for a home I live in?
No. DSCR loans are for investment property. For a home you live in, an agency loan applies, and with a 2 to 4 unit home, rent from the other units can help you qualify.
Is there a prepayment penalty?
Often, yes: a fee if you pay off or refinance within the first few years, often stepping down each year. Read the note, and ask what each option costs without one.
Do short-term rentals qualify?
With some lenders, using booking history or a market rent report. Others will not count short-term income. Local rules matter too.