Key takeaways
- DSCR = monthly rent ÷ PITIA (principal, interest, taxes, insurance, association dues).
- 1.00x is break-even; most lenders want 1.00–1.25x or higher, and some go below 1.00x at lower leverage.
- Typical 2026 terms: 30-year loans, 75–85% LTV purchases, starting rates roughly 5.75–7% for strong files.
- Watch the prepayment penalty. It can cost thousands if you sell or refinance early.
What is a DSCR loan?
A debt service coverage ratio (DSCR) loan is a long-term, business-purpose mortgage for rental property that is underwritten primarily on the property's income. Instead of verifying your W-2s or tax returns, the lender asks one main question: does the rent cover the payment? That makes DSCR loans popular with self-employed investors, people scaling beyond conventional loan limits, and BRRRR investors refinancing out of short-term debt.
The DSCR formula
For residential rental loans, lenders typically use:
PITIA = principal + interest + property taxes + insurance + HOA/association dues (monthly)
Commercial lenders often use net operating income divided by annual debt service instead, which subtracts operating expenses first. Always ask which method a lender uses.
A worked example
| Monthly market rent | $2,600 |
| Loan amount | $240,000 at 7.25%, 30-year amortizing |
| Principal & interest | ≈ $1,637 |
| Taxes ($3,600/yr) + insurance ($1,500/yr) | $425 / month |
| PITIA | ≈ $2,062 |
| DSCR | $2,600 ÷ $2,062 = ≈ 1.26x |
At 1.26x, this property would qualify with most DSCR lenders and likely earn better pricing than a file near 1.00x. Try your own numbers in the DSCR calculator, which also shows the maximum loan the rent supports at 1.00x and 1.25x.
Typical requirements
| Item | Common range (2025–2026 published programs) |
|---|---|
| Minimum DSCR | 0.75x–1.25x (sub-1.00x at lower LTV and higher rate) |
| Max LTV, purchase | 75–85% |
| Max LTV, cash-out refi | Commonly 70–75% |
| Credit score | About 620–680 minimum; best pricing 740+ |
| Reserves | Often 3–12 months of PITIA |
| Term | 30-year fixed, ARMs, interest-only options |
| Property types | 1–4 units, condos, some 5–8+ units, short-term rentals (program-dependent) |
| Borrower | Individual or LLC, investment property only |
What moves your rate
- Leverage: each step down in LTV usually improves pricing.
- DSCR: 1.25x+ often prices better than 1.00–1.24x; sub-1.00x costs more.
- Credit score: pricing tiers commonly break at 680, 700, 720 and 740.
- Prepayment penalty: accepting a longer penalty usually lowers your rate.
- Loan size and property type: very small loans, condos and short-term rentals may carry add-ons.
Refinancing a rehab into a rental?
Request DSCR lender matches and compare terms side by side.
Get DSCR matches →Prepayment penalties, decoded
Most DSCR loans include a prepayment penalty because lenders sell or securitize them expecting several years of interest. Common structures:
- 5-4-3-2-1: 5% of the balance if repaid in year 1, 4% in year 2, and so on down to 0% after year 5.
- 3-2-1: a three-year step-down.
- Fixed percentage: for example, 3% for three years.
- No prepay: available, usually at a noticeably higher rate.
On a $240,000 loan, a 5% first-year penalty is $12,000. If you might sell within a few years, pay for a shorter penalty.
Pros and cons
- No personal income verification
- Close in an LLC
- No limit on number of properties (lender-specific)
- 30-year fixed options
- Higher rates than conventional loans
- Prepayment penalties
- Larger down payments
- Rent appraisals can come in low
Frequently asked questions
Can I use short-term rental income?
Many programs accept projected or historical short-term rental income using market data tools or 12-month history, often with stricter leverage.
Can a DSCR loan pay off my hard money loan?
Yes. That's the "refinance" in BRRRR. Ask about seasoning: some lenders use the new appraised value immediately, while others require months of ownership. See BRRRR financing.