Definition
A DSCR loan is a real estate loan qualified on the property's debt service coverage ratio rather than the borrower's personal income.
How It Works
The lender compares the property's net operating income to its debt payments. A ratio above 1.0 means the property generates more income than its debt costs. Because qualification is based on the property, these loans are popular with investors whose personal tax returns understate their cash flow.
Example
An investor with strong rental income but heavy depreciation on their tax return qualifies for a DSCR loan based on the property's cash flow rather than their reported income.
When It Works Best
It works best for real estate investors building a portfolio whose tax returns do not reflect their true buying power.
Who It Applies To
Real estate investors, especially those with multiple properties.
Watch-Outs
Rates and down payment requirements are often higher than conventional loans, and the property must genuinely cover the debt.
