Getting funding can be an obstacle for real estate investors, both new and experienced. Traditional mortgage financing focuses on a borrower’s income, credit history, and personal finances, but these elements may not serve investors well, particularly when income isn’t accurately reflected on tax returns.
In this situation, a debt-service coverage ratio (DSCR) loan may be a viable alternative for those looking to purchase investment properties. By focusing on a property’s capacity to produce income instead of a borrower’s personal finances, DSCR loans provide a unique solution.
This article will explain DSCR loans, how they work, and how they can provide a path to financing an investment property without the need to provide traditional income documentation.
A DSCR loan is a non-qualified (non-QM) mortgage designed primarily for real estate investors. Instead of evaluating the borrower’s income, lenders use the debt-service coverage ratio to determine loan eligibility. This ratio measures a property’s net operating income (NOI) relative to its debts.
Make your dream home a reality with the right mortgage.
View RatesCalculating a debt-service coverage ratio is done to assess whether a property generates an income high enough to cover its debt obligations; namely, loan payments. In other words, it tells lenders whether the investment in question pays for itself.
The answer to the above calculation is important, as it gives investors and lenders an idea of how much of the property’s income covers its debt:
| Ratio | Meaning |
| 1.0 | The property’s income covers its debts exactly. |
| Over 1.0 | The property generates more income than needed to cover its debts. |
| Under 1.0 | The property doesn’t generate enough income to cover all its debts. |
Lenders use a DSCR to:
Lenders typically look for the following when assessing a DSCR loan application:
Minimum DSCR of 0.75 to 1.25
Minimum credit score of 620+
Typically 20% to 30%
Single-family homes, multifamily units, condos, and sometimes commercial properties
Income is typically verified through a lease agreement or rent analysis from an appraiser
As noted, your DSCR plays a key role in your ability to secure a DSCR loan to finance an investment property. If your calculated DSCR is too low (under 1.0 to 1.25), consider taking time to give it a boost using any of the following strategies:
Benefits
Drawbacks
When it comes to real estate investing, the line between an investment property and a second home can blur despite the common goal of generating income from the property. However, your intentions matter regarding financing, and understanding the difference between DSCR loans and mortgages used to buy a second home is essential.
Investing in a property solely for income is typically driven by cash flow and long-term returns, with tenants living there full-time. On the other hand, a second home is used partially by the owner, then rented out to others when unused by the owner to offset costs. While both paths can build wealth, they each cater to different goals and require different forms of financing.
DSCR Loans
Second Home Mortgages
For income-generating investment properties
For personal use (ie, vacation homes)
DSCR (property’s rental income)
Borrower’s personal income & debt-to-income (DTI) ratio
No personal income verification required
Requires income documentation from W-2s & tax returns
Typically 20% – 30%
May be as low as 10% (private mortgage insurance required for down payments less than 20%)
Slightly higher due to investor risk
Slightly higher than conventional mortgages, though it may be lower than DSCR loans
Non-owner occupied only
Must be owner-occupied part-time
Real estate investors
Buyers looking to finance a vacation home
No, DSCR loans are designed for investment properties that generate cash flow, and are not used to finance a primary residence.
Most lenders look for a DSCR of at least 1.0 to 1.25.
DSCR loans are suitable for real estate investors, self-employed borrowers, and those with non-traditional sources of income.
Generally, no. Traditional documents needed for standard mortgages — like tax returns, pay stubs, or W-2s — are usually not required. Instead, lenders focus on the property’s cash flow.
Eligible properties include single-family rentals, multifamily unit properties, and some commercial buildings, as long as they generate sufficient rental income.
Yes, DSCR loans often come with slightly higher interest rates compared to traditional mortgages as a result of the alternative underwriting approach.
Look for a mortgage lender, like Sammamish Mortgage, with experience underwriting these unique loan types.
Our loan officers are ready and waiting to help you apply for your home loan.
DSCR loans provide a flexible and powerful financing option for investors looking to purchase cash-flowing properties. By using the investment potential of a property instead of your personal finances, DSCR loans make the path to investing in real estate more accessible. Be sure to work with an experienced mortgage company, like Sammamish Mortgage, to help you navigate the process and choose the loan structure that’s most suitable for you.
If you’re looking to purchase an investment property in the Pacific Northwest region and prefer to use the property’s potential income in place of traditional income documentation to qualify, we can help. At Sammamish Mortgage, we offer various self-employed mortgage home loan programs for those without traditional employment documentation in WA, OR, ID, CO, and CA. Visit our website to get an instant rate quote, or get in touch with us today to have your mortgage questions answered!
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