Commercial Debt
DSCR Loans Explained
Debt Service Coverage Ratio (DSCR) loans are designed for real estate investors. Lenders qualify the property based on its own cash flow, completely ignoring your personal debt-to-income (DTI) ratio.
The Mathematics of DSCR
The calculation is straightforward: divide the Net Operating Income (NOI) by the annual Debt Service (Principal, Interest, Taxes, Insurance, and HOA - PITIA).
DSCR = Net Operating Income / Debt Service
- DSCR < 1.0x The property operates at a loss. It does not generate enough income to cover the mortgage. Very difficult to finance.
- DSCR = 1.0x The property breaks even. The rental income exactly covers the PITIA.
- DSCR > 1.25x The gold standard. The property covers the debt with a 25% safety margin. Easiest to finance, best rates.
Underwriting Requirements
While lenders don't look at your personal W2 income, they do care about the borrower's profile and the property's risk.
| Metric | Standard Requirement |
|---|---|
| Credit Score (FICO) | 680+ (720+ for best pricing) |
| Down Payment (LTV) | 20% to 25% (75% - 80% Max LTV) |
| Reserves | 6 months of PITIA per property in liquid assets |
| Experience | Some require 1-2 prior investment properties |
The Appraisal Reality Check
Lenders don't just take your word for the rent. They order a Form 1007 (Single Family Rent Schedule) alongside the appraisal. The lender uses the lower of the actual lease amount or the appraiser's market rent estimate to calculate the DSCR.