DSCR for first-time landlords

One ratio, one question

DSCR stands for debt-service coverage ratio. Take the property's monthly rent and divide it by the full monthly payment: principal, interest, property taxes, insurance and any association dues. A ratio of 1.0 means the rent exactly covers the payment; above 1.0 the property carries itself with room to spare; below 1.0 you are feeding it.

A DSCR loan qualifies the property on that ratio. Your personal income, tax returns and debt-to-income ratio do not enter the calculation. For investors whose returns show depreciation and write-offs, or who own several properties, that is the difference between financing the next door and being told no.

How rent is established

If the property is already leased, the lease sets the rent, often confirmed against the appraiser's market-rent schedule. If it is vacant or you are buying it, the appraiser's market-rent schedule stands in. Short-term rental income is treated differently by each investor: some count documented history, some use long-term market rent. Troy knows which programs fit which strategy.

Down payment, reserves and pricing

DSCR programs typically ask for a larger down payment than owner-occupied loans and for several months of reserves after closing. Pricing improves as the ratio rises and as the down payment grows. Many DSCR loans carry a prepayment penalty for the first years in exchange for better pricing, and the penalty structure can usually be chosen to match how long you plan to hold the property.

• Expect a meaningful down payment; the exact figure depends on the program and the ratio
• Expect to show reserves after closing
• Ask about the prepayment penalty options before you choose a rate
• Credit still matters: the borrower's score drives pricing even though income does not

Holding title in an LLC

Many DSCR programs allow the loan to close in the name of a limited liability company with a personal guarantee from the members. If you plan to hold rentals in an LLC, say so on the first call so the file is set up that way from the start.

Before you call

Troy runs the ratio on the first conversation. Bring the property address, the price or current balance, the current or expected rent, and an estimate of taxes, insurance and any dues. That is enough to tell you whether the property qualifies and roughly what it costs.