A DSCR loan is underwritten on the property instead of on you. There are no pay stubs and no tax returns, which is why investors reach for one. The trade is that the house has to qualify on its own, and when it falls short the lender does not decline you. It just lends less, and you make up the difference in cash.
That is the part worth planning for, because it moves the cash you need at closing by five figures.
What is a DSCR loan?
DSCR stands for debt service coverage ratio: the property’s income after running costs, divided by the loan payments. A lender with a 1.25 minimum wants the house to earn $1.25 for every $1 the loan takes.
A conventional loan asks what you earn. A DSCR loan asks what the house earns. The paperwork is lighter, and the lender’s attention sits on the rent roll and the appraisal rather than on your job.
What counts as a good DSCR covers the ratio itself, including the fact that lenders measure it in more than one way. This post is about the loan: how big it comes out, and what that does to the cash you bring.
What are a DSCR lender’s requirements?
Expect four, and note that only the first is really about you.
- A down payment. Each lender sets its own. This example asks for a loan of 75% of the price, so 25% down.
- A minimum coverage ratio, often 1.25. This is the requirement that decides the loan size.
- Reserves, meaning months of payments left in the bank after closing.
- A credit score floor, which gates the rate more than the approval.
There is no federal standard behind those numbers, which is why they vary so much between lenders. A loan to buy a rental you will not live in is business credit rather than consumer credit, so the consumer mortgage rulebook does not set the terms (CFPB). Each lender writes its own guidelines, and two quotes on the same house can differ by a lot.
So ask for the minimum coverage ratio by name, and ask which formula produces it, before you assume a loan amount.
How much will a DSCR loan lend on this house?
Take a $300,000 house renting for $3,200 a month, on a 30-year loan, with $3,600 of yearly property taxes and $1,800 of insurance. Allow 5% of rent for empty weeks, 5% for repairs, 5% for replacements and 8% for a manager. After those costs the house earns $24,168 a year, or $2,014 a month, before any mortgage.
Divide $24,168 by 1.25 and you get $19,334 a year of payments the lender will allow, which is $1,611 a month. That is the ceiling. The rate then decides how large a loan $1,611 a month can pay off over 30 years, and a higher rate buys less loan with the same payment.
| Rate | Coverage on $225,000 | Largest loan at 1.25 | Extra cash from you | |
|---|---|---|---|---|
| 7.25% | 1.31 | $236,185 | – | |
| 8.00% | 1.22 | $219,580 | $5,420 | |
| 8.50% | 1.16 | $209,542 | $15,458 |
These are example figures, not a quote.
At 7.25% the house covers a full $225,000 loan 1.31 times, so the lender’s rule never bites and you get the loan you asked for. At 8% the same house covers it only 1.22 times, so the lender writes $219,580. At 8.5% it covers 1.16 times, and the loan comes down to $209,542.
Nothing about the house changed across those three rows. The rent is the same, the costs are the same, the price is the same. Only the rate moved.
What does that do to the cash you bring?
The loan shrinks and the price does not, so the gap is yours to fund.
| At 7.25% | At 8% | At 8.5% | |
|---|---|---|---|
| Down payment | $75,000 | $80,420 | $90,458 |
| Closing costs (3%) | $9,000 | $9,000 | $9,000 |
| Cash to close | $84,000 | $89,420 | $99,458 |
A quarter of the price was $75,000. At 8.5% the same purchase needs $90,458 down, which is 30% rather than 25%, and $99,458 in total to get the keys. That is $15,458 more than the plan, and it is the kind of surprise that turns up two weeks before closing.
Why does the monthly payment stop moving?
Here is the part that catches people out. Once the coverage rule binds, the payment is fixed at $1,611 a month whether the rate is 8% or 8.5%, because the payment is set by the house’s income divided by 1.25, not by the rate. The rate only decides how much loan that payment buys.
So cash flow barely moves between those two rows, at $403 a month in both. The whole cost of the higher rate lands at closing instead, as a bigger down payment. Cash-on-cash return falls from 5.4% to 4.9% because the same profit now sits on more of your money.
That inverts the usual advice. On a conventional loan a higher rate shows up every month. On a DSCR loan at the coverage limit it shows up once, in a wire transfer, and then stays hidden in a return you have to calculate to see.
What should you ask before you make an offer?
Four questions, in this order.
- What is your minimum DSCR, and which formula do you use? Some lenders compare income after costs to the loan payment. Others compare rent to the full payment including taxes and insurance, which flatters the ratio.
- What rate are you quoting today, and does the loan amount in the pre-approval assume it?
- If the appraisal or the rent survey comes in low, does the loan shrink? Ask what cash that would take, and when you would hear.
- How many months of reserves, and do they count the extra cash a cut loan would need?
Then run the house yourself before the lender does. Put the price, rent and costs into the rental calculator and read the debt coverage line: if it sits near 1.25 at today’s rate, treat the loan amount in your plan as provisional and hold back cash for the gap. Where a rental’s rent counts toward a mortgage covers the conventional route, and what a $250,000 rental actually takes in cash sizes the closing table when nothing goes wrong.