DSCR loans are a popular choice for real estate investors because they focus on a property’s cash flow, not personal income. Here’s a quick look at the 7 main requirements you need to know:
- Credit Score: Minimum 620–680; higher scores get better terms.
- DSCR Calculation: Property income must cover debt; typically, DSCR ≥ 1.25 is required.
- Down Payment: Usually 20–30%, depending on property type and risk.
- Property Types: Covers single-family, multifamily, and short-term rentals; excludes fix-and-flip projects.
- LTV Ratio: Max 80% for long-term rentals; lower LTV gets better terms.
- Cash Reserves: 3–12 months of payments, based on loan size and DSCR ratio.
- Investment Experience: First-time investors may need a higher down payment (25%).
Quick Tips to Improve Approval Chances:
- Keep DSCR above 1.25.
- Maintain a credit score of at least 660.
- Provide a down payment of 20–30%.
- Build cash reserves to cover at least 3–6 months of payments.
These requirements make DSCR loans an excellent option for scaling your real estate portfolio, especially for properties with strong income potential.
DSCR Loans: The Greatest Investor Loan of All Time?
1. Credit Score Minimums
Your credit score plays a major role in getting approved for a DSCR loan. Most lenders require a score between 620 and 680. For example, Griffin Funding accepts scores as low as 620, although their average borrower has a credit score of 732 [1].
In February 2025, DSCR loan interest rates typically range from 6.75% to 8.50% [4]. Borrowers with scores above 700 often qualify for better rates and terms [3].
Here’s how credit score ranges generally influence DSCR loan terms:
| Credit Score Range | Impact on Loan Terms |
|---|---|
| 700+ | Best interest rates, lower down payments |
| 660-699 | Standard rates, standard requirements |
| 620-659 | Higher rates, larger down payment requirements |
To improve your credit score, try these strategies:
- Keep credit card balances under 30% of your credit limit.
- Set up automatic payments to avoid missing due dates.
- Check your credit report regularly for errors or inaccuracies.
- Avoid opening new credit accounts before applying for a DSCR loan.
For short-term rental properties, lenders often require a minimum score of 700. Experienced investors may need to put down 25%, while first-time investors might face a 30% down payment requirement [1].
Some lenders may consider lower scores if you have a high DSCR ratio or can make a large down payment. However, this usually comes with higher interest rates [5]. Strong credit is a key factor in securing better loan terms and sets the foundation for understanding DSCR calculations in the next section.
2. DSCR Calculation Rules
The formula for calculating DSCR is:
DSCR = Net Operating Income ÷ Total Debt Service [6]
A DSCR greater than 1 means the property generates enough income to cover its debt obligations. A ratio below 1 indicates negative cash flow. Typically, lenders look for a DSCR of at least 1.25, though this can vary depending on the type of property and associated risks [6].
Some lenders, like Griffin Funding, provide programs for borrowers with a DSCR below 0.75. However, these programs often come with stricter requirements, such as larger down payments and additional reserves [1]. Properties like hotels and self-storage facilities generally need a DSCR of at least 1.40, given the unpredictable nature of their revenue streams [6].
Here’s an expert tip from Ryles Murray, Senior Loan Officer at Griffin Funding:
"If they want to increase their DSCR ratio, investors should consider looking into two to four unit properties. With single family residences, especially if you’re looking at purchase prices over $400,000, meeting the 1:1 ratio can be difficult with 20% down. From my experience, if we’re looking at two, three, and especially four unit properties, those multiple unit properties will DSCR and cash flow a lot better than single family residences. So, if you’re looking at purchase prices over $400,000 and you want to keep your down payment lower, look at the multi-family units." – Ryles Murray, Senior Loan Officer at Griffin Funding [1]
To improve DSCR, consider strategies like using interest-only loans, extending loan terms to 40 years, targeting multi-unit properties, cutting down operating costs, and upgrading properties to command higher rents [8].
For example, a property with an annual Net Operating Income (NOI) of $2,150,000 and a yearly debt service of $350,000 achieves a DSCR of 6.14, making it eligible for the best loan terms [7].
3. Down Payment Rules
DSCR loans typically require a down payment ranging from 20–30%, helping lenders reduce risk while ensuring borrowers are committed to the investment [9].
The type of property plays a big role in determining the down payment. For example, residential multifamily properties often qualify for the lower end of the range (around 20%), making them appealing for investors aiming to keep upfront costs manageable. On the other hand, commercial and mixed-use properties usually require closer to 30% due to their higher risk levels.
Here’s a quick breakdown of common down payment requirements by property type:
| Property Type | Typical Down Payment | Key Considerations |
|---|---|---|
| Residential Multifamily | 20% | Lower risk; steady rental demand |
| Single-Family Rental | 20–25% | Depends on location and market trends |
| Commercial Property | 25–30% | Higher risk; unpredictable income |
| Mixed-Use Buildings | 25–30% | Complex management; mixed tenants |
For properties valued over $1 million, lenders often impose stricter requirements, factoring in market conditions and the borrower’s financial history to secure larger investments.
Some lenders may allow borrowers to use a Home Equity Line of Credit (HELOC) tied to existing properties to cover the down payment, provided there’s enough equity available.
To improve your chances of securing better down payment terms, consider these strategies:
- Present strong DSCR ratios to qualify for lower down payments.
- Focus on residential properties, which are often seen as lower risk.
- Target properties valued under $1 million to benefit from more flexible terms.
Lenders also typically require a loan-to-value (LTV) ratio of 80% or less, which aligns with the need for at least a 20% down payment. Familiarizing yourself with these rules can help you navigate DSCR financing more effectively.
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4. Property Types and Usage Rules
DSCR loans are designed to fund a variety of investment properties, but specific property types and usage rules play a huge role in determining eligibility. Let’s break it down.
Eligible Property Types
Here’s a quick look at which properties qualify and what’s required:
| Property Type | Eligible? | Key Requirements |
|---|---|---|
| Single-Family Residences | Yes | Must be move-in ready |
| Multifamily (2-10 Units) | Yes | Needs a proven rental history |
| Vacation/Short-Term Rentals | Yes | At least 60% occupancy required |
| Commercial Properties | Yes | Additional documentation needed |
| Properties < 750 sq ft | No | Too small to qualify |
| Manufactured/Mobile Homes | No | Excluded due to construction type |
Usage Rules
DSCR loans are strictly for investment properties. If you’re planning a fix-and-flip project, you’ll need to look elsewhere – these loans don’t cover those.
Short-Term Rentals
For short-term rental properties, lenders require proof that the property is a viable income source. This includes:
- A minimum 60% occupancy rate
- Income projections backed by tools like AirDNA
- The property must be move-in ready
Property Condition Standards
Properties must meet specific condition requirements to qualify:
- No major repairs or structural issues
- Fully functional, structurally sound, and compliant with zoning laws
Location Restrictions
Even if a property meets all other criteria, its location can still impact eligibility. Properties that might face challenges include:
- Rural properties with large acreage
- Condotels
- Dome homes
- Log cabins
Ownership Structure and Financing
One of the perks of DSCR loans is the flexibility in ownership. Many investors opt to hold properties under an LLC, which can simplify portfolio management. These loans typically offer up to 80% LTV, with loan amounts ranging from $100,000 to $3 million. Unlike traditional loans, DSCR loans focus on the property’s ability to generate income rather than the borrower’s personal income [2].
5. LTV Ratio Rules
Loan-to-Value (LTV) is a critical factor in DSCR loan approvals. It helps lenders evaluate risk and determine loan terms.
Maximum LTV Limits
Lenders set LTV limits based on the type of property being financed:
| Property Type | Maximum LTV |
|---|---|
| Long-term Rentals (1-2 units) | 80% |
| Short-term Rentals | 75% |
| Commercial Properties | 75% |
How LTV Affects Loan Terms
A lower LTV ratio often translates to better loan terms – like reduced interest rates and fewer upfront points [10]. This connection highlights why keeping your LTV low is important for securing favorable loan conditions.
Credit Score Expectations
If you’re aiming for a higher LTV, you’ll need a strong credit score. For example, an 80% LTV typically requires a minimum credit score of 700 [11].
Advantages of a Lower LTV
Keeping your LTV lower comes with several perks, such as:
- Better chances of loan approval
- More competitive interest rates
- Reduced monthly payments
- Increased equity protection
- Less collateral needed [10]
Property Value and LTV
The property’s value plays a major role in LTV calculations. DSCR loans generally cover properties valued between $100,000 and $20,000,000 [1]. Key factors influencing property valuation include:
- Current market value
- Property condition
- Location
- Rental income potential
- Property type
Refinancing Guidelines
If you’re refinancing a DSCR loan, you’ll need to retain 20-25% equity after the refinance [12]. This ensures a financial buffer and shows your ongoing investment in the property.
6. Cash Reserve Rules
Cash reserves play a key role in DSCR loan approvals. Along with property valuation and LTV guidelines, they help shape the terms of your loan and ensure you’re well-prepared for the application process.
Standard Reserve Requirements
The amount of cash reserves you’ll need depends on your DSCR ratio and loan amount. For instance, Griffin Funding outlines their requirements as follows [1]:
| DSCR Ratio | Loan Amount | Required Reserves | Down Payment | Credit Score |
|---|---|---|---|---|
| 1.00 or higher | Up to $1,000,000 | 3 months | 20% | 700+ |
| Less than 1.00 | Up to $1,000,000 | 6–12 months | 25–30% | 700+ |
Acceptable Reserve Sources
Lenders typically accept funds from the following sources:
- Checking and savings accounts
- Investment accounts (e.g., stocks, bonds, mutual funds)
- Vested retirement accounts
- Vested life insurance policies (cash value)
- Eligible gift funds
Unacceptable Reserve Sources
Certain sources are not allowed, including:
- Non-vested funds
- Stock in unlisted corporations
- Personal unsecured loans
- Cash-out refinance proceeds from the subject property
- Rent-back credit
- Contributions from interested parties
These distinctions allow for more tailored options offered by some lenders.
Competitive Advantage
Some lenders stand out by offering more lenient reserve requirements. For example, A&D Mortgage highlights their approach:
"Like other investment properties, DSCR loan lenders require a certain amount of cash reserves, often equal to six months of payments. We only require 3 months of reserves!" [13]
Reserve Calculation Method
Lenders calculate reserves based on the total monthly PITIA (Principal, Interest, Taxes, Insurance, and Association dues) payment. The required reserve must cover this payment for the specified number of months.
Impact on Loan Terms
Having higher cash reserves can improve your loan application, especially in these scenarios:
- Your DSCR ratio is below 1.00
- You’re applying for a larger loan
- The property is considered higher risk
- You have a lower credit score or smaller down payment
7. Investment Track Record
Your experience as an investor plays a key role in shaping the terms of a DSCR loan. Along with property and financial criteria, your track record can influence the loan’s risk assessment.
Experience-Based Requirements
Lenders assess how well you’ve managed residential properties in the past to gauge risk. Borrowers with at least one year of property ownership often qualify for a down payment as low as 20%. However, if you’re new to investing, you might need to put down 25% [1].
| Prior Ownership Duration | Minimum Down Payment |
|---|---|
| 1+ year of property ownership | 20% |
| No investment experience | 25% |
First-Time Investor Considerations
First-time investors aren’t excluded from DSCR loans but should be prepared for a 25% down payment. Charles Toll, Senior Loan Officer at Griffin Funding, shares:
"With a DSCR loan, since we’re not looking at an individual’s income, we ideally want to see that a borrower has a history of managing residential real estate." [1]
Compensating Factors
If you lack experience, lenders may look at other strengths, such as a larger down payment, strong credit, or substantial cash reserves, to balance the risk.
Portfolio Growth Strategy
For experienced investors, DSCR loans can be a powerful tool to grow your portfolio. These loans focus on the property’s income rather than your personal earnings, simplifying the financing process and allowing you to scale your investments more effectively.
Conclusion
Understanding and meeting DSCR loan requirements is crucial for real estate investors. These loans have become a popular financing option, offering a straightforward approval process and terms tailored for property investors.
Why Meeting DSCR Requirements Matters
Meeting these requirements doesn’t just boost your chances of approval – it also helps you secure better loan terms. DSCR loans focus on the performance of the property rather than personal income, making them an appealing choice for investors managing several properties.
Tips to Strengthen Your DSCR Application
To increase your chances of approval and secure better terms, consider these strategies:
| Strategy | How It Helps |
|---|---|
| Keep DSCR at or above 1.25 | Shows the property generates enough income to cover debt payments |
| Maintain a Credit Score above 660 | Opens the door to lower interest rates |
| Provide a Down Payment of 20–25% | Reduces lender risk and shows your commitment |
| Have Cash Reserves | Acts as a financial cushion for unexpected expenses |
The Road Ahead
Investor purchases made up 16% of the U.S. housing market in Q3 2024 [1], highlighting the growing role of DSCR loans in real estate financing. These loans are particularly useful for investors who face challenges with traditional income-based qualification. Properties with multiple units often meet DSCR standards more easily, and partnering with experienced DSCR lenders can simplify the process. By meeting these criteria, investors can use DSCR loans to effectively grow their portfolios.
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