DSCR
What is a DSCR Loan?
A Debt Service Coverage Ratio (DSCR) loan is a type of Non-Qualified Mortgage (Non-QM) financing specifically designed for investment property transactions designated for business purposes only.
The defining characteristic of a DSCR loan is that qualification is based solely on the property’s cash flow potential—measured by its rental income—rather than the borrower’s personal income, employment history, or tax returns.
The loan uses the Debt Service Coverage Ratio (DSCR) as its primary metric. The DSCR is calculated by dividing the Gross Rental Income of the property by the Monthly Housing Payment.
DSCR loans are also characterized as full recourse loans, meaning the borrower or guarantor is personally responsible for repayment.
Get More In-Dept Details About DSCR Loans
Articles that give you more information about this loan and explain how mortgages work.
Who is Generally Eligible to Borrow Under DSCR Loan Guidelines?
Eligibility for DSCR loans centers on the property’s use and the borrower’s financial stability, particularly credit history and reserves, rather than personal employment.
Property and Use Requirements:
- Occupancy: The property must be strictly non-owner-occupied. Borrowers, members of the borrower’s LLC, or family members are generally not allowed to reside in the property.
- Property Type: Eligible properties are primarily income-generating real estate, including single-family homes, duplexes, triplexes, and fourplexes (1–4 units). Some programs may allow up to 10 units. The property must be in “turnkey” or “rent-ready” condition.
- Business Use: For cash-out refinances, all proceeds must be used solely for a business purpose.
Borrower and Credit Requirements:
- Personal Income/DTI: Personal income is not required, and a Debt-to-Income (DTI) ratio is generally not calculated.
- FICO/Credit Score: Minimum FICO requirements typically start at 660, although the range can vary between 620 and 680 depending on the program and risk. Borrowers with higher scores (e.g., 720 or above) usually qualify for the lowest rates and highest LTVs.
- Investor Status: First-Time Investors (FTIs) are generally allowed if they meet specific criteria, such as higher DSCR ratios and credit scores. They cannot be classified as First-Time Homebuyers (FTHB) for certain elite programs.
- LLC/Entity Borrowing: Taking title in the name of an LLC is allowed if the LLC is registered in the U.S., has up to four owners, and the borrowers are the managing members with authority to sign. All guarantors are required to provide personal recourse.
- Foreign Nationals: Eligible for specific DSCR Non-QM programs (such as Horizon, Advantage, and Sharp), but they are subject to stricter guidelines, including lower maximum LTVs and higher reserve requirements (typically 12 months).
What are the Primary DSCR Loan Income Documentation Methods?
DSCR loans do not require traditional personal income documentation like W-2s, tax returns, or employment verification. Instead, income is documented by verifying the property’s ability to generate cash flow:
- Standard Rental Income: We calculate the DSCR using the Gross Rental Income. The income figure used is the lower of the actual lease amount or the market rent opinion from the appraisal.
- Short-Term Rental (STR) Income: Income from STRs (like Airbnb or VRBO) can be used, provided the income is legally permitted in the location.
- Verification can be through an appraisal or third-party vendor validation.
- Documentation typically requires 12 months of documented income from the home-sharing platform or property management company (net of fees).
- Some programs use tools like AirDNA projections to estimate income. For instance, one program uses 80% of estimated gross receipts for qualifying rental income.
What are the DSCR Loan Eligibility Requirements After Bankruptcy or Foreclosure?
Eligibility following a major credit or housing event (such as a Short Sale, Foreclosure, Bankruptcy, or Deed-in-Lieu) is determined by the required seasoning period. These seasoning requirements vary significantly by the specific loan program:
- Our Prime DSCR requires a minimum of 24 months seasoning since the credit event.
- Our Non-QM Advantage requires 36 months.
- Our Sharp DSCR and Our Edge Investor Classic require at least 3 years seasoning.
- Our Edge Investor Elite requires 4 years seasoning.
How Does a DSCR Loan Work?
A DSCR loan works by utilizing the Debt Service Coverage Ratio (DSCR) to determine lending capacity and risk.
The Calculation:
The DSCR formula is: DSCR = Gross Rental Income ÷ Monthly Housing Payment.
- Gross Rental Income: The income generated by the property, typically confirmed by a lease or market rent appraisal.
- Monthly Housing Payment (Debt Service): For standard loans, this is known as PITIA, which includes Principal, Interest, Taxes, Insurance, and HOA dues. For interest-only loans, ITIA (excluding Principal) is used during the interest-only period.
Qualification Tiers:
The DSCR ratio dictates the property’s ability to cover its monthly obligations and influences the loan terms.
- Break-Even Point: A DSCR of 1.0 means the property generates exactly enough income to cover its debt obligations.
- Favorable Ratio: Ratios of 1.25 or higher are generally considered strong, providing a safety margin and potentially qualifying the borrower for better rates and terms.
- Minimums: Minimum acceptable ratios typically range between 1.0 and 1.25. Some Non-QM programs, depending on the risk profile and loan size, may allow lower DSCRs, such as 0.75 or 0.80. A “No Ratio” program may allow DSCRs from 0 to <0.75.
Interest Rate Factors:
Since personal income is not used, interest rates are determined by factors related to property risk and borrower stability:
- DSCR Ratio: Higher ratios often result in lower interest rates.
- Credit Score: Higher scores typically secure more favorable rates.
- LTV Ratio: Lower Loan-to-Value ratios (larger down payments) are preferred and can reduce rates.
- Property Type: Short-term rentals (STRs) are considered higher risk and may carry slightly higher rates (0.5%–1%) due to income variability.
What are the Pros and Cons of DSCR Mortgages?
DSCR mortgages offer distinct advantages and disadvantages compared to traditional financing:
| Pros (Advantages) | Cons (Disadvantages) |
| Simplified Qualification: No need for personal income, W-2s, tax returns, or DTI calculations. | Strict Occupancy: Loans are strictly for non-owner-occupied properties. |
| Portfolio Expansion: Typically no maximum limit on the number of financed properties (some programs allow up to 20), exceeding conventional limits. | Mandatory Reserves: We typically require 3 to 12 months of property expenses (PITIA/ITIA) in reserve. |
| Speedy Closing: The closing timeline is often faster than conventional mortgages, frequently occurring within 2–3 weeks. | Prepayment Penalties (PPP): These are common and permitted, often structured as a flat 5% or a sliding scale (e.g., 5-4-3-2-1). Choosing shorter or no penalty terms may require accepting a higher interest rate. |
| Entity Flexibility: Investors can take title in the name of an LLC. | Full Recourse: The borrower or guarantor retains personal responsibility for repayment. |
| Focus on Asset Performance: Qualification is based solely on the rental income generated by the investment asset. | Higher LTV/Down Payment: Minimum down payments generally range from 20% to 35%. |
What is different about DSCR loans from Shining Star Funding
We offer several DSCR (Debt Service Coverage Ratio) programs across its different Non-QM product series. The differences primarily lie in the loan parameters, eligibility requirements, and acceptable risk levels depending on which our product series is used (Advantage, Connect, Edge, Horizon, or Prime).
Here is a detailed breakdown of what is different about DSCR loans offered by us:
1. Distinct DSCR Programs and Documentation Approach
We offer multiple DSCR products, all of which are designed for investment property transactions and are explicitly designated as business purpose loans, exempting them from the Ability-to-Repay (ATR), Qualified Mortgage (QM), and High-Priced Mortgage Loan (HPML) requirements in some cases.
The general principle across all programs is that qualification is based on the cash flow from the subject property (Gross Rent divided by the monthly PITI or ITIA payment), not the borrower’s personal income, meaning no DTI ratio is calculated.
| Our Product Series | DSCR Program Names | Key Differentiators |
| Advantage | Advantage DSCR | Includes 30 YR and 40 YR fixed options, including interest-only (IO). |
| Connect | Connect Investor Cash Flow (ICF) | Offers 40 Yr Fixed IO and various ARM terms (7/6, 10/6). Has specific residual income requirements for non-DSCR loans. |
| Edge | Edge Investor Classic / Edge Investor Elite | Edge Elite has lower max LTVs but potentially higher loan amounts and stricter seasoning (4 years) compared to Classic (3 years). |
| Horizon | Horizon Non-QM Elite DSCR / Horizon Non-QM DSCR / DSCR No Ratio | Horizon Elite DSCR requires a minimum DSCR of 1.00 (or 1.15 for STR) and a high minimum credit score (720). The DSCR No Ratio program specifically allows DSCR between 0.00 and < 0.75. |
| Prime | Prime Non-QM DSCR | Allows LTVs up to 80% for DSCR >= 1.00 with 680+ FICO. |
2. Loan Parameters and Features
Our DSCR programs vary significantly in terms of maximum loan size, amortization structure, and permitted features:
Maximum Loan Amount & LTV
- Sharp DSCR programs max out at $2.0 million.
- Edge Investor Classic goes up to $3.0 million for DSCR ?1.00.
- Horizon Elite DSCR caps at $2.0 million.
- Horizon DSCR (non-Elite) goes up to $3.0 million.
- The Prime Non-QM DSCR caps at $2.0 million for DSCR ?1.00.
- DSCR loans allow high LTVs, reaching up to 85% on the Edge Investor Classic DSCR ?1.0+ program for Purchase/Rate-Term Refinance (with high FICO)
Loan Terms and Interest Only (IO)
We offer flexible amortization periods across its DSCR programs:
- Our Advantage offers both 30 YR and 40 YR fixed terms, with 10-year Interest Only options available for both.
- Our Edge offers 30 YR Fixed and 30 YR Fixed 10 yr IO. The 40 YR Fixed IO is permitted, but the fully amortizing 40-year term is typically not permitted on Edge Investor Elite or Classic DSCR <1.0 programs.
- Our Horizon DSCR offers 40-Year Fixed I/O (10 year I/O followed by 30-year amortization) up to a max 75% LTV, and 30-Year Fixed I/O up to a max 80% LTV.
- Our Connect offers 40 Yr Fixed IO and adjustable-rate mortgages (7/6 ARM and 10/6 ARM).
- Horizon DSCR Elite allows borrowers to qualify using the Interest-Only (I/O) payment.
3. DSCR Ratio Requirements
The required Debt Service Coverage Ratio (DSCR) dictates the maximum allowable LTV and minimum FICO score for the loan:
- Sharp DSCR offers qualification at 0.75 ext{x} (where rent covers 75% of the payment) or higher, and offers a “No Ratio” DSCR option with restrictions.
- Horizon DSCR also allows a minimum DSCR of 0.75 ext{x} (for loans ?$125,000).
- Horizon Non-QM DSCR No Ratio is specifically designed for cases where the DSCR is between 0 and < 0.75.
- Edge Investor Classic has a program for DSCR ?1.0+ and a separate program for DSCR 0.75 – 0.99.
4. Borrower and Property Eligibility
The requirements concerning borrower history and property type are structured differently across our DSCR programs:
| Feature | Our Advantage / Prime / Connect | Our Sharp DSCR | Our Edge DSCR | Our Horizon DSCR |
| Credit/Housing Event Seasoning | Advantage: 36 months. Prime: Not specified in matrix, but other programs require 2-4 years. Connect: N/A | 3+ Years seasoning after foreclosure, short sale, or bankruptcy. | Classic: 3 years. Elite: 4 years seasoning. Multiple bankruptcies are ineligible. | Horizon DSCR: ?36 Months. DSCR No Ratio: 3 years, Chapter 13 discharged/dismissed \geq 2 years. |
| First Time Investor (FTI) | Connect: FTI must have a primary residence. | Permitted if DSCR is >1.0 and FICO >700. Cannot be a First Time Homebuyer. | Classic: Permitted with max 80% LTV, min 1.0 DSCR, and min 680 FICO. Elite: Ineligible. | Elite: FTI must have owned property for ?1 year in the last 3 years. |
| Short-Term Rental (STR) Income | Not generally mentioned as an explicit program type. | Sharp DSCR: Permitted for both purchase and refinance. Calculation uses 100% of 1007 market rent or 12-month STR income history. | Elite: Not allowed. Classic: Allowed in some cases using long-term annual rents. STR income calculation not allowed. | Elite: Requires min 1.15 DSCR. Horizon DSCR: Minimum 0.75 DSCR. DSCR No Ratio: Not permitted. |
| Reserves (Months PITIA/ITIA) | Advantage: 6 months. Connect ICF: Varies by loan amount and DSCR. | 3 months minimum. No additional reserves for other financed properties. | DSCR > 1.0: 6 months (LTV >70% or loan >$1.5MM); No reserves (LTV <70% and loan ?$1.5MM). | DSCR \geq 1.00: Varies by loan amount/LTV, starts at 6 months. No Ratio: Not specified in matrix. |
| Geographic Restrictions | Prime: DSCR ineligible in many cities/counties (Baltimore, Brooklyn, Cook County, etc.). | Sharp: Investment property in Baltimore City, MD, ineligible. Rural properties ineligible. | Edge: Georgia loans must close in an entity for Elite. | Horizon: Investment properties ineligible in DC, Lubbock (TX), Brooklyn (NY). |
5. Qualification Methodology
All of our DSCR loans use the fundamental DSCR calculation (Gross Rents / PITIA or ITIA). However, key differences exist in how the payment is calculated for IO loans:
- DSCR vs. Non-DSCR IO Qualification: For Non-DSCR (owner-occupied/standard programs), We generally requires qualification based on the fully amortized payment (P&I) even if the loan is interest-only. For DSCR loans, Shining Star Funding allows qualification using the Interest-Only (ITIA) payment.
- DSCR No Ratio (Horizon): This unique program offers flexibility by allowing loans even if the property’s rental income (Gross Income) is less than the monthly payment (PITIA), resulting in a DSCR between 0 and 0.75. This program specifically does not permit Interest-Only payments.
How Do I Apply for a DSCR Mortgage?
The application process for a DSCR loan focuses heavily on the financial health of the property and the borrower’s reserves, rather than personal employment.
Required Documentation:
Key documents typically required for application include:
- Property Appraisal: Essential to confirm the market value and provide an independent market rent opinion.
- Rent Roll or Lease Agreement: Used to verify the actual or projected rental income.
- Bank Statements: Must demonstrate financial stability and confirm sufficient cash reserves (usually 6–12 months of PITIA/ITIA).
- Proof of Property Insurance.
- Debt Obligations: Details of any existing debts associated with the property.
Avoiding Common Mistakes:
To ensure a smooth application and approval, investors should avoid common pitfalls:
- Overestimating Rental Income: Using conservative market rent estimates is safer than overly optimistic projections, which can lead to loan denial.
- Underestimating Costs: Remember to factor in total costs, including fees, taxes, insurance, and property maintenance, not just the down payment.
- Incomplete Documentation: Providing all required documents accurately and completely is critical, as missing items can cause delays or denial.
- Not Comparing Lenders: Since loan terms and rates vary significantly, it is important to shop around among multiple lenders.
FAQ's
A Debt Service Coverage Ratio (DSCR) loan is a type of Non-Qualified Mortgage (Non-QM) financing designed exclusively for investment property transactions that are designated for business purposes only. These loans are generally used for residential income-producing properties, typically ranging from one to four units, although some programs may allow up to 10 units
A DSCR Loan works by prioritizing the investment property’s cash flow over the borrower’s personal income, with qualification based on calculating the Debt Service CoverageA DSCR Loan works by prioritizing the investment property’s cash flow over the borrower’s personal income, with qualification based on calculating the Debt Service Coverage Ratio (DSCR). The DSCR is determined by dividing the Gross Rental Income by the Monthly Housing Payment (PITIA or ITIA), and lenders use this ratio (typically aiming for 1.0 or higher) to ensure the property’s income can adequately cover its debt obligations. Since these are full recourse loans, the individual borrower or guarantor is personally responsible for repayment, even if the property is vested in an LLC
The DSCR Loan Eligibility Requirements After Bankruptcy or Foreclosure are dictated by the mandatory seasoning period following the credit event, which varies significantly across loan programs. For instance, our Prime DSCR program requires a minimum of 24 months seasoning, while the Non-QM Advantage requires 36 months. More exclusive programs like our Edge Investor Elite require the longest seasoning period, typically 4 years since the credit event occurred
Investors are Eligible to Borrow Under DSCR Loan Guidelines primarily based on the investment property’s cash flow potential, as personal income, DTI, and employment verification are typically not required for qualification. To qualify, the property must be strictly non-owner-occupied and used for business purposes, and the borrower must meet minimum credit requirements (FICO typically starting at 660) and demonstrate sufficient cash reserves (generally 3 to 12 months of property expenses
The Primary DSCR Loan Income Documentation Methods focus on the property’s cash flow, completely bypassing the borrower’s personal income, W-2s, or tax returns. Lenders primarily use the lower of the actual lease amount or the market rent opinion from the appraisal to calculate the DSCR. For short-term rental (STR) properties, documentation may require 12 months of documented income from the rental platform or property manager (net of fees), and some programs utilize AirDNA projections to estimate qualifying rental income
Key among the Pros and Cons of DSCR Mortgages is the significant advantage that qualification relies entirely on the investment property’s cash flow, eliminating the need for personal income or employment verification, and allowing investors to finance a higher number of properties than conventional limits. Conversely, primary cons include the strict mandate that the property must be non-owner-occupied, requirements for cash reserves typically ranging from 3 to 12 months, and the common inclusion of prepayment penalties that restrict early payoff flexibility
he process for applying for DSCR Loans simplifies documentation by focusing entirely on the property’s cash flow potential, meaning borrowers generally do not need to provide W-2s, tax returns, or personal employment verification. To apply, you must submit key documents which typically include a property appraisal (to confirm market value and rent opinion), the rent roll or lease agreement verifying income, and bank statements that demonstrate required cash reserves, which usually cover 6 to 12 months of expenses
527 Sycamore Valley Rd W, Danville, CA 94526
Toll Free Call : (866) 280-0020
For informational purposes only. No guarantee of accuracy is expressed or implied. Programs shown may not include all options or pricing structures. Rates, terms, programs and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions may apply. Equal Housing Opportunity.
Interactive calculators are self-help tools. Results received from this calculator are designed for comparative and illustrative purposes only, and accuracy is not guaranteed. Shining Star Funding is not responsible for any errors, omissions, or misrepresentations. This calculator does not have the ability to pre-qualify you for any loan program or promotion. Qualification for loan programs may require additional information such as credit scores and cash reserves which is not gathered in this calculator. Information such as interest rates and pricing are subject to change at any time and without notice. Additional fees such as HOA dues are not included in calculations. All information such as interest rates, taxes, insurance, PMI payments, etc. are estimates and should be used for comparison only. Shining Star Funding does not guarantee any of the information obtained by this calculator.
Privacy Policy | Accessibility Statement | Term of Use | NMLS Consumer Access
CMG Mortgage, Inc. dba Shining Star Funding, NMLS ID# 1820 (www.nmlsconsumeraccess.org, www.cmghomeloans.com), Equal Housing Opportunity. Licensed by the Department of Financial Protection and Innovation (DFPI) under the California Residential Mortgage Lending Act No. 4150025. To verify our complete list of state licenses, please visit www.cmgfi.com/corporate/licensing