DSCR Loan Basics

What is a DSCR loan?

A DSCR loan is a loan on an investment property where the lender looks mainly at whether the property's income can cover the loan payments. DSCR stands for debt service coverage ratio.

Fannie Mae's Multifamily Guide, which covers loans on multifamily properties, defines that ratio. It compares a property's net cash flow with its required payments of principal, interest and certain other financing.

Source: Fannie Mae, "Debt Service Coverage Ratio | Fannie Mae Multifamily Guide (glossary)"

Do federal consumer loan rules cover a loan on a rental property?

The CFPB's Regulation Z doesn't cover a loan to buy, improve or keep up a rental property that the owner doesn't live in. Its official comments treat that kind of loan as business credit, no matter how many units the property has. One example is a single-family house rented to another person to live in.

That rule doesn't apply if the owner expects to live in the property for more than 14 days in the coming year. When the owner lives in the rental property, different rules apply.

Regulation Z doesn't apply to any loan made mainly for a business purpose, or to a loan made to someone other than an individual, such as a company. It's the federal rule that holds the ability-to-repay and qualified mortgage rules.

The lender decides in each case whether a loan is mainly for a business purpose.

Sources: eCFR, "12 CFR 1026.3, Exempt transactions (Regulation Z)"; Consumer Financial Protection Bureau, "§ 1026.3 Exempt transactions. (Regulation Z, with official interpretation)"; Consumer Financial Protection Bureau, "§ 1026.43 Minimum standards for transactions secured by a dwelling. (Regulation Z, with official interpretation)"

Does the ability-to-repay rule apply to a DSCR loan?

The ability-to-repay rule doesn't apply to a DSCR loan made mainly for a business purpose, even if a home secures the loan. The rule covers consumer loans secured by a home. Its official comments say it doesn't apply to business-purpose loans.

For the loans it covers, the ability-to-repay rule makes most lenders decide, in a reasonable and good faith way, that you can repay before they lend. Lenders generally must find out, consider and document your income, assets, employment, credit history and monthly expenses.

When a loan falls outside the rule, those federal rules don't apply to it.

Sources: Consumer Financial Protection Bureau, "§ 1026.43 Minimum standards for transactions secured by a dwelling. (Regulation Z, with official interpretation)"; Consumer Financial Protection Bureau, "What is the ability-to-repay rule?"

Is a DSCR loan a qualified mortgage?

A DSCR loan made mainly for a business purpose isn't judged by the qualified mortgage rules. Those rules are part of the ability-to-repay rule, which doesn't cover business-purpose loans. The CFPB says a qualified mortgage is one way a lender can follow the ability-to-repay rule.

The CFPB says a qualified mortgage has less risky features and protections that make it more likely you can afford it. In general, it can't have an interest-only period or a balance that can grow while you make payments. The lender must also consider and verify your income or assets and debts.

Sources: Consumer Financial Protection Bureau, "§ 1026.43 Minimum standards for transactions secured by a dwelling. (Regulation Z, with official interpretation)"; Consumer Financial Protection Bureau, "What is the ability-to-repay rule?"; Consumer Financial Protection Bureau, "What is a Qualified Mortgage?"