This article is presented by Figure.
One of the most asked questions by rookie investors is, “How do I grow my portfolio if my income is low or unstable?”
Obviously, if your real estate investing is a side gig and you have substantial regular income, this isn’t for you. You already know that you have the option to go down the traditional mortgage route to buy your next investment property.
But if you are self-employed and your income is variable, you likely won’t qualify for a traditional mortgage loan. Assuming that you also, at this point, don’t have access to equity in your own home to take out a loan, your options are beginning to look very limited.
But that’s because you likely have never explored the DSCR loan route. Its eligibility criteria are fundamentally different from ordinary mortgage products. All you need is one investment property that is generating rental income. If your property can pay for itself, you may qualify for a loan—even if your personal finances say otherwise.
Here’s what every serious investor should know about DSCR financing.
What Is a DSCR Loan?
A DSCR (debt service coverage ratio) loan is a type of mortgage specifically angled at real estate investors because it allows the applicant to borrow against a rental property’s cash flow as opposed to the borrower’s income.
This can be especially useful for investors whose income documentation may not meet traditional mortgage requirements, such as self-employed individuals or those with variable income.
Rather than relying solely on traditional income documentation, the lender will zoom in on your rental property’s ability to meet its debt obligations. How? By comparing the property’s income to its debt burden.
Basically, they will want to see if the total net operating income per annum exceeds the total loan repayments. This is the basis for the simple formula lenders will use as a factor in deciding whether to approve the DSCR loan: annual net income, divided by annual debt service payments (principal and interest payments, property taxes, and homeownership association fees). This is the DSCR ratio.
The Importance of a Good DSCR Ratio
A good ratio is crucial for getting approved for a DSCR loan.
What is considered a good debt service coverage ratio? Most lenders prefer a DSCR of 1.25 or higher, as it indicates stronger cash flow. However, some lenders—including Figure—may accept DSCRs as low as 1.0, depending on other factors like credit score and property type.
Let’s imagine you have a property with an annual debt obligation of $100,000, an annual rental income of $150,000, and annual expenses of $40,000. That leaves you with a net operating income (NOI) of $110,000, which, when divided by the annual debt obligation, gives you a ratio of 1.1—might be too low to qualify for a loan with most lenders.
Once you understand your DSCR and are considering a loan, remember that the loan is taken out against the property’s rental income. If, for whatever reason, you experience a dip in rental income, you will need those cash reserves to cover the payments, while still meeting all your existing debt obligations.
It is essential to do your calculations right when figuring out if you’ll qualify for a DSCR loan: Always subtract all relevant expenses, including repairs and maintenance/management fees, from your NOI before you get to working out the ratio.
If you’re getting a low ratio, you may want to look into ways of increasing the rental income or reducing your expenses before applying for a DSCR loan.
Common DSCR Loan Misconceptions
There is one piece of fundamentally good news for investors who have a property or properties generating a steady rental income. Chances are you can utilize this underused loan strategy to expand your portfolio. And, for investors whose personal finance history works against them on mortgage applications, DSCR loans can be a valuable solution.
However, there are a few details to be mindful of to maximize your chances of success:
Less paperwork doesn’t mean no paperwork.
It’s true you likely won’t need to fetch tax returns and pay stubs. However, proof of rental income isn’t the only thing you’ll need. Lenders will want to know the current market value of the property, so you’ll need to get an appraisal done. To lessen this burden, consider lenders that use automated valuation models (AVM) and can do this digitally.
Give it time.
You will typically need at least 12 months of rental income to prove the property can be borrowed against.
Ensure you have a downpayment.
For purchase transactions, DSCR loans typically require a down payment of approximately 20% to 30%, depending on credit profile, property type, and underwriting criteria. Because these loans are designed for investment properties, minimum equity contributions are often higher than for owner-occupied traditional mortgages.
Borrowers should ensure they have sufficient capital to meet down payment and reserve requirements before applying. While some investors explore additional financing options, such as a home equity loan or line of credit (HELOC), to access liquidity, taking on additional debt can increase overall financial risk and reduce cash flow. Any such decision should be carefully evaluated in light of total debt obligations and long-term investment strategy.
Final Thoughts
A DSCR loan is an underused financing strategy every real estate investor should be aware of. If you have even a single property that’s generating healthy, stable rental income, you have a potential lifeline for your portfolio expansion.
DSCR loans are typically easy to apply for, can take less time to get approved than traditional loans, and take your personal income out of the equation—crucial for the self-employed investor. Do your calculations diligently, and you could get the financing you need to grow your portfolio at your pace.
If you’re ready, Figure has loans to suit many investor needs. With their DSCR loan, you could get approved for up to $1,000,000 (1) in days, not months. Their HELOC is even faster—you can get approved in five minutes, and funding in as few as five days (2).
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Figure Lending LLC dba Figure 650 S. Tryon Street, 8th Floor, Charlotte, NC 28202. (888) 819-6388. NMLS ID 1717824. For licensing information go to www.nmlsconsumeraccess.org. Equal Opportunity Lender.
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Figure DSCR is available in AK, AL, AR, AZ, CA, CO, CT, DE, FL, GA, ID, IN, KS, KY, LA, MA, MD, ME, MO, MS, MT, NC, ND, NE, NH, NJ, NM, NV, OH, OK, PA, SC, SD, TN, TX, VA, WA, WI, WV and WY with more states to come.
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Equal Housing Opportunity
- Figure’s DSCR loan amounts range from a minimum of $75,000 to a maximum of $1,000,000. Your maximum loan amount may be lower than $1,000,000, and will ultimately depend on home value, lien position, credit profile, verified rental income amount, and equity available at the time of application. We determine home value and resulting equity through a full field appraisal.
- Figure’s HELOC approval may be granted in five minutes but is ultimately subject to verification of income and employment, as well as verification that your property is in at least average condition with a property condition report. Five business day funding timeline assumes closing the loan with our remote online notary, and where loan amounts are under $400,000 which would not require an appraisal. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing, or that require a waiting period prior to closing, or where loan amounts exceed $400,000.
