A DSCR loan, or Debt Service Coverage Ratio loan, is a type of mortgage primarily used by real estate investors to qualify for financing based on the rental income generated by the property rather than the borrower's personal income
. Unlike conventional loans that require proof of personal income through tax returns or pay stubs, DSCR loans assess the borrower's ability to repay by evaluating the cash flow of the investment property itself
. The key metric in a DSCR loan is the Debt Service Coverage Ratio (DSCR), which is calculated by dividing the property's rental income by its total debt obligations, including principal, interest, property taxes, insurance, and association dues (often abbreviated as PITIA)
. A DSCR of 1 or above typically indicates that the property's income is sufficient to cover its debt payments, making the borrower eligible for the loan
. For example, a DSCR of 1.2 means the property generates 20% more income than needed to cover debt service, which lenders view favorably
. DSCR loans are considered non-QM (non-qualified mortgage) loans because they do not require traditional income verification, making them ideal for investors who may have significant write-offs or deductions that reduce reported income but still have strong rental cash flow
. These loans can be used to purchase income-generating properties but not primary residences or fixer-uppers, and they often require higher down payments and credit scores around 620 or above
. In summary, a DSCR loan allows real estate investors to secure financing by demonstrating that the property's rental income can cover the loan payments, simplifying qualification and expanding investment opportunities without relying on personal income documentation
