What is a DSCR loan, and how is the ratio calculated?

DSCR stands for debt service coverage ratio. A DSCR loan qualifies on whether the property's rent covers the property's payment — not on your W-2, your tax returns, or your employment history. For investors whose returns are full of depreciation and write-offs, that difference is the entire product.

The calculation

Divide the property's gross monthly rent by its total monthly debt service. Debt service means principal, interest, taxes, insurance, and HOA dues — commonly abbreviated PITIA.

DSCR = gross monthly rent ÷ (principal + interest + taxes + insurance + HOA)

A property renting for $2,400 with PITIA of $2,000 has a DSCR of 1.20. That means the rent covers the payment 1.2 times over — a $400 monthly cushion. A DSCR of 1.00 means rent exactly covers the payment with nothing left. Below 1.00, the property does not carry itself and the borrower is covering the gap from elsewhere.

What number you need

• 1.25 and above: strong. Broadest pricing and leverage available.
• 1.00 to 1.25: standard territory for most DSCR programs.
• Below 1.00: possible on some programs at reduced leverage and higher pricing, often called a debt-service-coverage exception or no-ratio program.

Short-term rentals price differently from long-term ones. A property on a nightly platform is usually underwritten off trailing twelve months of booking and revenue history rather than a signed lease, and lenders discount that income to account for seasonality and vacancy.

What a DSCR file actually asks for

The paperwork is genuinely lighter than a conventional mortgage, which is the other half of the appeal. Expect the lease and rent roll or written confirmation of vacancy, the most recent property tax bill, an insurance declarations page or bindable quote, HOA dues if applicable, entity documents, a driver's license for each guarantor, two months of bank statements, and a signed credit authorization.

What you will not be asked for: tax returns, W-2s, pay stubs, or employment verification.

What kills a DSCR file

• It is your primary residence or a second home. DSCR is investment-only, without exception.
• The property needs significant rehab — that is a bridge or fix-and-flip product, not a DSCR loan.
• A recent bankruptcy or foreclosure still inside the seasoning window.
• No entity, and the borrower is unwilling to form one.
• Rural or highly unusual property types that comparable sales cannot support.
• Cash-out on a property owned for less than the program's seasoning period.

Structure choices that move your rate

Two decisions change your pricing more than most borrowers expect. The first is interest-only versus fully amortizing — interest-only lowers the payment, which raises your DSCR, which can unlock leverage you would not otherwise qualify for. The second is the prepayment penalty: a shorter prepay structure such as 3-2-1 carries a higher rate than a longer 5-4-3-2-1. If you intend to sell or refinance inside three years, paying up for the shorter prepay is usually the cheaper decision overall.