Today’s post is about: DSCR Loans (Debt Service Coverage Ratio AKA “No Doc” Loans)

What it is

A DSCR loan is a mortgage for an investment property where the lender qualifies you mainly based on the property’s rental income—not your personal income.

Instead of focusing on your W-2s or tax returns, the lender looks at whether the property’s rent can cover the monthly mortgage payment.

DSCR stands for Debt Service Coverage Ratio.

Who it’s for

This loan is for real estate investors who:

• Want to buy or refinance a 1–4 unit rental property
• Don’t want to fully document personal income
• Have solid credit and some cash reserves

It’s common for borrowers who are self-employed, write off a lot on taxes, or just want a simpler income process.

How DSCR is calculated (simple)

DSCR = Monthly rent ÷ Monthly housing payment

The “housing payment” usually includes:

• Principal + interest
• Property taxes
• Insurance
• HOA (if applicable)

Example:

• Rent = $3,000/month
• Mortgage payment (PITI) = $2,500/month
• DSCR = 3,000 ÷ 2,500 = 1.20
  

A DSCR over 1.00 usually means the rent covers the payment.
Some lenders allow below 1.00 (like 0.00–0.99), but the rate/terms are usually worse.

How rent is determined

Lenders use one of these:

• Current lease (if the property is already rented)
• Appraisal rent schedule (market rent estimate / “1007”)
  
• Sometimes both

If the lease is higher than market, the lender may still use the market rent number—it depends on the lender.

How much you can borrow

DSCR loans usually require a down payment. Typical ranges:

• 20–25% down for purchases
• Refi max LTV is often 70–80%, depending on the deal and DSCR

Rates are usually higher than conventional loans because they’re designed for investors and have fewer income docs.

What is a prepayment penalty? (and why it matters)

A prepayment penalty is a fee some lenders charge if you pay off the loan early—usually if you refinance or sell within a certain period.

On DSCR loans, prepay penalties are commonly 0–5 years.

The 3 common types:

1. Fixed % (hard prepay)
   Example: 5% of the loan amount if you pay it off during the penalty window (some lenders keep the % the same each year).
2. 6 months interest
   If you pay off the loan early, you owe about six months of interest as the penalty.
3. Step-down / declining
   This is the most common structure.
   Examples:

• 5-4-3-2-1 (five-year step-down)
• 3-2-1 (three-year step-down)

Bottom line: If you might refinance soon, the prepay penalty can be the difference between a good deal and a bad one.

Process (high level)

1. Apply (basic borrower + property info)
2. Credit is checked
3. Provide asset docs (bank statements for down payment + reserves)
4. Provide lease (if any)
5. Appraisal is ordered (includes rent estimate)
6. Underwriting reviews DSCR, LTV, and borrower strength
7. Close and fund

What to watch out for

• Make sure your broker is quoting the actual DSCR ratio the lender is using (not just “you’re fine”)
• Confirm the prepayment penalty (years + type: fixed, 6 months interest, or step-down)
• Confirm the FICO score they’re pricing off (and which credit report/model they’re using)
• Confirm points and fees clearly—watch for “junk” fees like:
  • attorney/lawyer fee (when it’s not really needed)
  • processing fee
  • admin/underwriting/doc prep fees that feel padded
  • any other “misc” fees that aren’t standard
• Don’t compare quotes without comparing rate + points + prepay + DSCR + LTV together

Bottom line

DSCR loans are one of the simplest ways for investors to finance rental properties because approval is based mainly on rental income and the property’s ability to carry itself.

If you’re buying or refinancing a rental and don’t want the headache of full income documentation, DSCR is usually the first place to look.

Since 2023, Josh Dan has been a licensed loan officer. He takes complex finance and makes it simple, helping borrowers understand their options and make smart decisions. Connect with Josh at joshuadan.com