These Loans Are Helping Real Estate Investors Buy and Rent Out Homes—So Why Doesn’t Everyone Get One?

When most people buy a house, they use a mortgage to help finance the purchase. For conventional or government-backed loans, the borrower submits an application to a lender, who investigates the borrower’s finances, assesses their ability to repay, and disburses the loan to the borrower personally. 

Now imagine that you don’t need to qualify for the loan based on factors like your income or personal debt. Instead, you make the case that the home you want to buy will pay for itself. 

These are debt service coverage ratio (DSCR) loans, and investors are using them to buy and rent out homes across the country. In fact, their use is surging: DSCR loan volume in the first quarter of 2026 reportedly jumped 54% year over year. 

So why don’t ordinary homebuyers use DSCR loans? The answer depends on what you’re using the loan for—and even if you do qualify, there are some things to look out for. 

Explaining DSCR loans

DSCR loans are used to buy properties as a real estate investment. That means the borrower is intending to use the property as a rental. It could be a long-term rental unit, a short-term vacation rental for platforms like Airbnb, or a mixed-use commercial and residential space. 

A DSCR loan is a "non-qualified mortgage," meaning it doesn’t follow the income-verification rules of a standard home loan and isn’t eligible to be bought by Fannie Mae and Freddie Mac. It is funded by institutional investors and private capital. 

Some rules around DSCR loans are similar to what you’d see for a typical home loan: Borrowers need a down payment of 20% or more and should have a solid credit score—with higher scores unlocking better rates. However, borrowers don’t need to verify their personal income. The baseline qualification for the loan is whether the rental property's income would cover the mortgage payment. That’s the “ratio”: the property’s rent divided by its total monthly debt payment. This ratio should generally be 1.0X or better. 

“The lender compares the property’s rent with the full housing payment, including principal, interest, taxes, insurance, and any association dues. A 1.0X DSCR means the rent covers the payment exactly,” says Zach Cohen, founder and CEO of Ridge Street Capital, a direct private lender writing DSCR loans. 

In short, if your rental is able to pull in enough money to cover your mortgage—the more room to spare, the better—then you’re likely in business. 

Can regular homebuyers use DSCR loans?

For typical home purchases, a DSCR loan is a no-go. That’s because DSCR loans can’t be used for primary residences.

“A primary residence mortgage comes with consumer protections that do not apply the same way to business-purpose investment property loans,” says Cohen. “Lenders verify occupancy during underwriting, and borrowers sign documents confirming they will not live in the property.”

If you’re seeking a loan for investment property purposes, DSCR loans have an advantage over conventional investment loans: There is no limit on the number of DSCR loans you can borrow. 

“A DSCR allows a borrower to build a portfolio of rental properties regardless of the borrower's other sources of income or other loan obligations. As a result, a borrower can build a portfolio of rental properties, each having an independent loan and each being isolated from any other property's loan default risk,” says Howard Jacobson, a real estate investor and developer at Stronglast Builders in Raleigh, NC. 

Note that DSCR loans need to be for “rental-ready” properties, meaning you can’t use the loan to fix up a distressed house. You can, however, use a bridge loan to buy and renovate a space, then refinance it into a long-term DSCR. 

The risks of DSCR loans

Because DSCR loans don’t have typical underwriting and consumer protections, they carry some risks that lenders of conventional loans might protect borrowers against. 

For example, because these loans are not based on personal financial factors like debt-to-income ratio, and there is no cap on the number of DSCR loans a person, LLC, or corporation can take out, borrowers can easily overextend themselves. There simply isn’t the same kind of scrutiny of borrowers at this level. 

One recent story highlights the potential for misuse: A wave of foreclosures in Baltimore was the result of a large number of DSCR loans taken out by the same investors. According to the Baltimore Banner, buyers purchased more than 700 homes at inflated prices, and while they supposedly planned to make renovations and updates, most of the properties had no renovation or construction permits pulled in years. Now, many of those homes are in foreclosure, putting the homes’ renters at risk and affecting the neighborhoods’ property values. 

The scheme reportedly involved fraud by local appraisers and title company actors, who duped lenders into supplying the inflated loans. Mortgage fraud isn’t unique to DSCR loans, but there are other ways that the loans can pose risks. 

“Vacancy is the risk that catches many investors first,” says Cohen. “With a conventional mortgage, the borrower’s salary may still support the payment when a tenant leaves. With a DSCR loan, the property is expected to carry the payment. If the rent stops, the investor needs enough cash reserves to cover the gap. That can add up quickly. Two months of vacancy, plus turnover costs, on a house renting for $1,600 per month can erase a year of cash flow.”

DSCR loans also typically carry prepayment penalties, so any plans to sell or refinance quickly need to be priced into the deal before closing. 

Using DSCR loans responsibly

Borrowers like Jacobson say that DSCR loans, when used responsibly, carry no more risk than any other investment. 

“The primary risk of a DSCR is nonpayment, which is a risk for any loan, although the legal protections against foreclosure are less for DSCR and all commercial loans than for a primary residence mortgage loan,” Jacobson says. “All investments have the risk of a loss of value and/or a loss of investment income sufficient to pay any loan used to purchase the investment.”

That said, first-time borrowers looking to use DSCR loans should start by reviewing the math on their side of the equation, advises Cohen. That means starting with net rent, even though lenders often review gross rent, and running a ratio that includes a vacancy discount, maintenance of the property, and a capital reserve. 

“If the deal only works at the top of the market rent range, the deal is too thin,” he says. 

Additionally, borrowers and lenders alike need to have an exit plan in mind. A lender that doesn’t ask about the exit, says Cohen, is a red flag. 

“A good lender should understand what happens if the plan changes,” he says. “On fix-and-flip files, we run two scenarios: the sale, and the fallback plan if the investor cannot sell at the projected price and needs to refinance into a long-term rental loan instead. If neither exit works, the deal carries more risk than the projection shows.”

For investors who run the numbers carefully and plan their exit, DSCR loans can be a powerful tool. For everyone else, the same flexibility that makes them appealing is what makes them risky.