Question 1

What is a DSCR loan?

Accepted Answer

A DSCR (Debt Service Coverage Ratio) loan is investment-property financing that qualifies the PROPERTY's cash flow rather than the borrower's personal income + W-2. The lender's underwriting question: does the property's NOI cover annual debt service at the required floor (typically 1.0×, 1.20×, or 1.25×)? If yes, the loan qualifies regardless of the borrower's W-2. Useful for self-employed investors, real-estate professionals, or borrowers at the Fannie Mae 10-property cap.

Question 2

What's the difference between Fannie Mae conforming and DSCR loans?

Accepted Answer

Fannie Mae conforming investment-property loans qualify the borrower (W-2 income, DTI, credit score) AND the property (LTV, DSCR). DSCR loans qualify only the property. Trade-offs: Fannie Mae rates are typically 1-1.5% lower (because conforming = lower lender risk + secondary-market liquidity), require 20-25% down on 1-unit / 25-30% on 2-4 unit, cap at 10 financed properties per borrower per Fannie Mae §B2-2. DSCR rates run 1-1.5% above Fannie Mae but accept self-employment + portfolio investors above the 10-property cap, often as non-recourse on larger loans.

Question 3

What DSCR floor should I expect?

Accepted Answer

Floors vary by lender + product tier. Common: 1.0× (aggressive — break-even on debt service), 1.20× (industry-standard for conforming + most DSCR products), 1.25× (more conservative, typical Fannie Mae multifamily §B6 underwriting). Some DSCR lenders go to 0.75× on 'no-ratio' programs but pricing on those is materially higher. Higher floor = more borrower equity required and / or stronger property cash flow.

Question 4

Why does true APR matter more than the headline rate?

Accepted Answer

Origination points + lender fees are PERMANENT cost — paid at closing, not refunded if you refinance early. Most DSCR loans are 30-year amortization but most borrowers exit at year 5-7 (refinance, sale, or 1031 exchange). Amortizing the upfront cost over the actual hold period materially raises the effective cost: 1.5 points on a 5-year hold adds ~0.30% to effective APR; on a 3-year hold it adds 0.50%. Always compare DSCR products on true APR over expected hold, not nominal rate.

Question 5

How do prepayment penalties work on DSCR loans?

Accepted Answer

Standard structure is a step-down schedule like 5-4-3-2-1 (5% in year 1, 4% in year 2, etc.) applied to the outstanding loan balance at the time of payoff. Some lenders use 3-year hard schedules (full penalty if any prepay before year 3); some use yield-maintenance (penalty equals the lender's lost interest income vs. holding to schedule). Prepay penalty matters most if you anticipate refinancing into conforming financing once you qualify, or selling within 2-3 years.

Question 6

Can I use a DSCR loan for short-term rentals?

Accepted Answer

Some DSCR lenders accept short-term rental income (Airbnb, VRBO) for qualification, others require 12 months of stabilized history. The income is typically discounted (e.g., 75% of trailing 12-month STR income) to account for seasonality + regulatory risk. Rules vary by lender and by jurisdiction — many cities have STR restrictions that affect underwriting. Verify with the specific lender + check local regulations before structuring around STR income.

Question 7

What's the max LTV on a DSCR loan?

Accepted Answer

Typical maximums: 80% LTV on purchase / rate-and-term refi, 75% LTV on cash-out refi. Some lenders offer 85% LTV on purchase but rate increases meaningfully. The cash-out cap is the binding constraint on BRRRR strategies — even if the property qualifies on DSCR at 80%, most lenders cap cash-out at 75% to preserve their underwriting cushion against future declines.

Question 8

Is the DSCR loan recourse or non-recourse?

Accepted Answer

Most DSCR loans on small residential (1-4 unit) are full-recourse — the lender can come after the borrower's other assets if the property loan defaults. Non-recourse DSCR products exist on larger commercial deals ($1M+ multifamily, retail, industrial) but the rate trade-off is meaningful (50-100 basis points premium). Some lenders offer 'limited recourse' carve-outs (bad-boy guarantees only — fraud, environmental contamination, voluntary bankruptcy). Always verify the recourse structure on the term sheet.

DSCR Loan Calculator

What this means

Worked example

Frequently asked questions

Show the math