Apollo AdvisingDSCR loans for rental property, explained
How DSCR loans for rental property work: how lenders calculate the ratio, what the loans usually cost compared with conventional mortgages, and when one fits.
Short answer. A DSCR loan qualifies you based on the property's rent instead of your personal income. Lenders divide the monthly rent by the monthly payment including taxes, insurance, and any HOA dues. Many want a ratio of at least 1.0 to 1.25. The tradeoff is usually a higher rate, a larger down payment, and often a prepayment penalty compared with a conventional loan.
How the ratio is calculated
DSCR stands for debt service coverage ratio. For these loans, most lenders use gross monthly rent, from a lease or an appraiser's rent estimate, divided by the full monthly housing payment: principal, interest, property tax, insurance, and HOA dues. A ratio of 1.0 means the rent exactly covers the payment.
An example
A house renting for $2,400 a month, with a $240,000 loan at 7.5% over 30 years. Principal and interest are about $1,678. Add $600 of property tax and $220 of insurance and the payment is about $2,498, for a DSCR of 0.96.
To reach 1.25 on this rent, the payment would need to be about $1,920 or less, which usually means a bigger down payment or a lower price.
Notice what the ratio leaves out: vacancy, repairs, management, and capital reserves. A property can qualify for a DSCR loan and still lose money every month once those are counted.
How they compare with conventional loans
| DSCR loan | Conventional investment loan | |
|---|---|---|
| Qualifies on | The property's rent | Your income, debts, and tax returns |
| Typical down payment | Often 20% to 25% or more | Often 15% to 25% for investment property |
| Rate | Usually higher | Usually lower |
| Prepayment penalty | Common, often stepping down over several years | Rare |
| Borrow in an LLC | Often allowed | Usually personal name |
| Number of properties | Fewer caps | Limits on financed properties |
Terms vary widely by lender and change with the market, so treat this as a map of the questions to ask, not a rate sheet.
When a DSCR loan tends to fit
- Self-employed owners whose tax returns understate their income after deductions
- Investors who have reached the limit on conventional financed properties
- Buyers who want to hold title in an LLC from the start
- Properties with strong rent relative to price
They tend to fit poorly when the rent barely covers the payment, when you might sell or refinance within a few years and trigger a prepayment penalty, or when you qualify easily for a conventional loan at a lower rate.
Where we fit
We help you decide whether the property works under the financing you are being offered, before you commit. Apollo Advising does not arrange loans or give lending advice. Denver McClure holds an ownership interest in Fiduciary Financing LLC, a loan advisory firm, and may be compensated if you use it; you are never obligated to. See our disclosures.
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Go deeper
How to analyze a rental property before you buyCap rate, cash-on-cash return, DSCR, and the expense lines first-time buyers leave out.Cash-out refinance or HELOC on a rental?How each one works on an investment property, what they cost, and the cash flow test to run first.Return on equity: the rental number most owners never checkHow to calculate it, why it drifts down as a property appreciates, and what it does and does not tell you about selling.This page is general education, not legal, tax, investment, insurance, or lending advice. See our disclosures.