The Investor’s Guide to
DSCR Loans
Investing in rental properties can be a powerful way to build wealth, and financing plays a crucial role in making that dream a reality.
For investors looking to purchase rental or short-term vacation properties (Airbnb), a Debt Service Coverage Ratio (DSCR) loan can be an excellent option.
In this guide, we’ll break down how DSCR loans work, their benefits, and who they’re best suited for, as well as their pros and cons. Let’s dive in!
What is a DSCR Loan?
A DSCR loan is a type of real estate financing specifically designed for investment properties.
Unlike traditional loans that rely on your personal income and employment history, DSCR loans focus on the property’s income potential. In simple terms, lenders use the Debt Service Coverage Ratio to determine whether the property’s income can cover the loan payments.
The DSCR formula is:
DSCR = Property’s Net Operating Income (NOI) ÷ Debt Obligations
Net operating income is the projected rental income minus expenses such as taxes and insurance (but not the mortgage payment)
A DSCR of 1.0 means the property’s income exactly covers its debt obligations. Most lenders require a DSCR of 1.2 or higher to approve the loan.
For example:
Let’s say you were buying a $500,000 property that is expect to rent for $3,000 per month. It has $4,000 a year in property taxes and $1,500 per year in insurance. The Net Operating Income would be $36,000 – $5,500 = $30,500 NOI.
