Overview from Francisco Cabrera:
Debt Service Coverage Ratio (DSCR) loans evaluate the rental income potential of an investment property rather than the personal tax returns or W-2s of the investor. Here is how underwriting works and what tradeoffs you should know.
Understanding the DSCR Formula
DSCR = Gross Monthly Rental Income ÷ Total Monthly Housing Expense (PITIA: Principal, Interest, Taxes, Insurance, and HOA).
A DSCR of 1.0x means the rental income exactly breaks even with the monthly mortgage and holding costs. A ratio of 1.20x means the property produces 20% more rent than expenses, providing cash flow protection for both you and the lender.
Documentation & Property Eligibility
Because personal tax returns are not scrutinized, documentation centers on the asset itself, investor liquid reserves, and credit standing.
- Appraisal with Form 1007 Rent Schedule to establish fair market rent
- Existing lease agreement (for occupied properties)
- Liquid reserves: typically 3 to 6 months of PITIA payments held in bank or brokerage accounts
- Ownership structure: Properties can be titled in an LLC or personal name
Honest Caveat: Prepayment Penalties
Many DSCR programs include prepayment penalties (such as 3-year or 5-year step-downs) in exchange for pricing flexibility. Francisco reviews all terms transparently before locking.
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Cabrera Mortgage · Francisco Cabrera, NMLS #2348359 · Bright Horizon Lending Inc., NMLS #2565670