The property's numbers come first.
What DSCR means
DSCR stands for debt service coverage ratio. It compares the property's rent to its monthly payment, including principal, interest, taxes, insurance and any HOA dues. If a home rents for $3,000 a month and the full payment is $2,500, the ratio is 1.2. That means the rent covers the payment with some room to spare.
Why investors use them
Traditional loans qualify you on your personal income, which can be a problem if you're self employed, write off a lot of expenses, or already own several rentals. A DSCR loan focuses mainly on the property. That makes it easier to keep growing without your tax returns becoming the bottleneck. Many DSCR lenders also allow you to close in an LLC.
What lenders look at
The ratio is the starting point, but lenders also review your credit, how much you're putting down, your cash reserves, and the property itself. A higher ratio and stronger credit generally earn better terms. Some lenders will lend when the rent doesn't fully cover the payment, usually with tighter requirements.
Short term rental income
Not every DSCR lender treats vacation rental income the same way. Some use projected short term rental revenue from market data. Others use actual booking history, or only the long term market rent. This choice can change how much you qualify for, so it's one of the first things to sort out on a vacation home purchase.
DSCR or conventional?
DSCR uses the full rent. Conventional uses 75% or your Schedule E. See projected rent vs Schedule E.
If your tax returns support the income and you have fewer than 10 financed properties, a conventional investment loan is usually cheaper, with no prepayment penalty. See conventional vs DSCR and conventional investment property loans. Run any deal through the rental property calculator to see its DSCR ratio.
The tradeoffs
DSCR loans usually cost more than a conventional investment loan, and many include a prepayment penalty if you sell or refinance in the first few years. They're a tool, not the default. If you qualify easily for conventional financing and plan to hold, compare both before you decide.
DSCR guides
Requirements, the math, short term rentals, cash out refinancing and prepayment penalties.
Rental investing guides
Longer guides on financing, running the numbers and checking the rules.