By Matt Allen
Vice President, Portfolio Lending (NMLS #415037)

What is a DSCR Loan?

Mar 22, 2023

  • DSCR Loans
  • Non-QM Loans
  • Investment Property Loans

To understand how a DSCR loan works, you first need to know what DSCR means.  A Debt Service Coverage Ratio (DSCR) is used by lenders to determine a borrower’s ability to pay back a loan based on the income they will receive from the investment property they purchase.  The calculation is determined by dividing the net operating income by the total debt service.

  DSCR formula2

In other words, if a borrower doesn’t show sufficient positive income from their property after operating expenses (including the principal and interest payments on a loan), the lender will not issue a loan.

DSCR loans are appealing to real estate investors because they can qualify for the loan based on the cash flow generated by their investment property, instead of having to document personal income or provide tax returns. Many lenders require a minimum DSCR of 1.1x, and a down payment as low as 20% with the right DSCR and credit score.  DSCR lenders also have additional requirements that may include the following:

  • Up to 80% max loan-to-value (LTV) ratio
  • Eligible property types are 1-4 family and warrantable condos
  • There may be a minimum and maximum loan amount
  • A pre-payment penalty may apply (NASB does not impose a pre-payment penalty)
  • Loan terms can vary from 5 to 30 years

Real estate investors can use a DSCR loan to purchase residential, commercial, or mixed-use properties. If you would like more information on how to purchase real estate investment properties using a DSCR loan*, talk to the experts at NASB at 855-921-4921 or click here for more information.

*Not available in New York, and not available in all locations or for all property types. Loans subject to underwriting and eligibility criteria, and other factors.  Your loan officer will provide you with more information regarding DSCR loans and what may work best for your situation.