DSCR Loan Below 1: Can a Rental That Doesn't Cash Flow Still Qualify?

By Travis Penny, Senior Mortgage Broker, NMLS 1649161.

You found a rental you like, ran the numbers, and the rent comes up a little short of the payment. On most DSCR programs that's a DSCR under 1.0, and a lot of investors assume the deal is dead. It isn't always. Here's how I make a rental that doesn't quite cash flow work, and when you shouldn't. For the full checklist of what lenders look at, see my DSCR loan requirements guide. For the main program page, see DSCR loans in 38 states.

DSCR loans are for investment property only, never a home you live in.

Quick refresher: how DSCR is figured

DSCR is monthly rent divided by the full monthly payment: principal, interest, taxes, insurance and any association dues. Rent of $1,800 against a payment of $2,000 is a DSCR of 0.90. Rent of $2,000 against $2,000 is 1.00.

Way one: qualify on an interest only payment

On the programs I have access to, the ratio can be figured on a 30 or 40 year interest only payment. With no principal in the payment, it's lower, and the same rent gives a higher ratio.

Take that same rental. If the fully amortizing payment is $2,000 and the interest only payment is $1,750, rent of $1,800 goes from a 0.90 DSCR to about 1.03. Nothing about the property changed, only the payment structure. I cover the longer terms on my 40 year and interest only mortgages page.

Way two: a sub 1.0 DSCR program

Some programs accept a ratio below 1.0. Expect tradeoffs: a larger down payment, more months of reserves, and a stronger credit score. Pricing is usually higher too. It fits investors who have the cash and a clear reason to own the property.

Other levers worth checking first

• Market rent. If the appraiser's rent schedule comes in higher than the current lease, some programs use it.
• Short term rental income. A history or a projection can show more income than a long term lease, where local rules allow it.
• Insurance and taxes. A better insurance quote can move the ratio more than people expect, especially in Florida.
• More down. A smaller loan means a smaller payment.

Run them through my DSCR calculator to see where you land.

When a sub 1.0 deal makes sense, and when it doesn't

It can make sense with a value add plan, below market rents you can raise at renewal, a strong appreciation market, or seasonal short term income. It doesn't make sense if you can't comfortably cover the gap every month for a year or more. Reserves are your safety net.

FAQ

Can you get a DSCR loan with a ratio below 1?

Yes. Some programs I have access to allow a DSCR below 1.0, usually with a larger down payment or more reserves. Investment property only.

How does interest only help a DSCR?

The ratio divides rent by the payment. An interest only payment is lower than a fully amortizing one, so the same rent produces a higher DSCR.

Why would anyone buy a rental that doesn't cash flow?

Appreciation, a plan to raise rents, a value add rehab, or a short term rental with seasonal income. The numbers still have to work for you.

Is a DSCR below 1 riskier?

Yes. You cover the shortfall each month, so reserves matter. I go over the monthly gap with you before you buy.

What is the minimum DSCR for a loan?

Many programs want 1.0 or higher, some go lower. It varies by program, credit and down payment.

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Send me the address, the rent and the price, and I'll tell you which way gets the deal over the line. Start your application, or reach me through my contact page.

Travis Penny, Senior Mortgage Broker, NMLS 1649161 | Vision Mortgage, NMLS 1286953 | Residential loans in Maine and Florida, DSCR loans in 38 states.