What is DSCR?

DSCR (debt service coverage ratio) is a rental property's monthly rent divided by its monthly loan payment, including taxes, insurance, and HOA dues. A $2,400 rent over a $2,000 payment is a 1.20x DSCR. Most lenders require 1.20x. Ledger qualifies DSCR loans down to 1.00x.

DSCR Definition

DSCR stands for Debt Service Coverage Ratio. It is a financial metric that measures a property's ability to generate enough rental income to cover its debt obligations. Lenders use DSCR to evaluate whether an investment property can support its own financing, independent of the borrower's personal income.

Unlike conventional mortgages that rely on W-2 income, tax returns, and debt-to-income (DTI) ratios, DSCR loans focus entirely on the property's cash flow. This makes DSCR a critical metric for real estate investors, portfolio landlords, and entity borrowers who may not qualify through traditional underwriting channels.

How DSCR is Calculated

Lenders typically use the property's market rent (determined by an appraisal with a rent schedule or a third-party rent analysis) rather than the actual lease amount. This ensures the qualification is based on what the property could reasonably generate, not an above-market or below-market lease.

Worked Example

What is a Good DSCR?

DSCR ratios fall into a few general categories:

• 1.25x and above: Strong coverage. The property generates meaningfully more income than its debt service. This typically qualifies for the best rates and terms.
• 1.00x to 1.24x: Adequate coverage. The property covers its debt obligations but with a thinner margin. Most lenders require compensating factors (higher credit score, lower LTV, or larger reserves) in this range.
• 1.00x: Breakeven. The property's income exactly equals its debt service. Ledger's DSCR loan program qualifies down to 1.00x on 1 to 4 unit properties, where most lenders stop at 1.20x.
• Below 1.00x: Negative cash flow. The property does not fully cover its debt service from rental income alone. Select lenders offer sub-1.00x DSCR programs (sometimes called "no-ratio" DSCR) with higher down payments and credit requirements.

DSCR vs. DTI: What is the Difference?

DTI (Debt-to-Income Ratio) is the traditional metric used by conventional mortgage lenders. It measures a borrower's total monthly debt payments against their gross personal income. DTI requires full income documentation: W-2s, pay stubs, tax returns, and verification of all liabilities.

DSCR ignores the borrower's personal income entirely. Qualification is based solely on the subject property's rental income relative to its carrying costs. No tax returns, no employment verification, and no DTI calculation.

This distinction matters most for self-employed borrowers, business owners who minimize taxable income, investors holding properties in LLCs, and anyone scaling a rental portfolio where personal DTI becomes a bottleneck. Builders who hold what they build use a DSCR loan as the rental refinance that pays off the construction loan.

Why DSCR Loans Exist

DSCR loans were designed to solve a specific problem: experienced real estate investors who own cash-flowing properties but cannot qualify for conventional financing due to how their income reports on paper. Common borrower profiles include:

• Portfolio investors with 10+ financed properties who have exceeded conventional loan limits
• Self-employed borrowers whose tax returns show lower income due to depreciation and business deductions
• Entity borrowers (LLCs, corporations) that cannot use personal income documentation
• Foreign nationals investing in U.S. rental property without a domestic income history
• BRRRR investors refinancing stabilized rentals after a value-add renovation

Common DSCR Loan Terms

DSCR loan programs are structured as long-term permanent financing, not short-term bridge or construction loans. Typical terms include:

• Loan term: 30-year fixed rate or 5/6 ARM (adjustable after 5 years)
• Amortization: 30-year fully amortizing, with interest-only options available for the first 5 or 10 years
• Loan amounts: $75,000 to $2,000,000+ depending on the program
• LTV: Up to 80% on purchases, up to 75% on cash-out refinances
• Prepayment: Varies by program. Some offer no prepayment penalty; others include a 3 or 5 year declining structure.
• Vesting: Borrowers can close in an LLC, trust, or individual name

Eligible Property Types

DSCR loans typically cover a range of residential investment properties:

• Single-family homes (1 unit)
• 2-10 unit properties (duplex, triplex, fourplex, small multifamily)
• Townhomes (condominiums are not eligible at Ledger)
• Short-term rental / Airbnb properties (with documented rental income)

Maximum 10 units per building. Larger multifamily and apartment complexes are not eligible. The property must be investment-only. DSCR loans are not available for primary residences or second homes.

Related: The BRRRR Strategy Explained — how investors use DSCR loans as the refinance step in a buy-rehab-rent-refinance-repeat cycle.