Key Takeaways

  • Qualify Based on Property Income, Not Personal Income: DSCR loans allow rental property investors to qualify based on the property’s rental income potential rather than personal tax returns or debt-to-income ratios.
  • DSCR Calculation & Requirements: Lenders calculate DSCR by dividing the property’s net operating income (NOI) by total debt service, with most requiring a minimum DSCR of 1.2, though some lenders like ABL accept DSCRs as low as 1.0.
  • Flexible Terms for California Investors: DSCR loans typically offer 30-year fixed terms with up to 80% LTV, and can be used for purchases, refinances, and both long-term and short-term rentals including vacation properties.
  • How to Improve Qualification Odds: Target properties with strong rental income that exceeds loan payments, prepare a 20%+ down payment, maintain a FICO credit score of 660 or higher, and set aside 6-12 months of reserves for vacancies.

With California’s median home value now above $850,000, it’s no surprise that many rental investors need financing. But what if you’ve already exhausted your traditional mortgage options? Can you still qualify for a rental loan? 

The answer is yes—if you know where to look. DSCR lenders allow you to qualify based on the property’s income potential rather than your personal tax return. At ABL, we’ve issued DSCR loans statewide with flexible terms, competitive rates, and our constant support. Let’s explore the DSCR loan California requirements and how they work.

What Is a DSCR Loan in California?

A DSCR (Debt-Service Coverage Ratio) loan is a type of mortgage for rental properties that is approved based on the property’s income potential rather than the borrower’s personal income. This frees borrowers from traditional debt-to-income (DTI) requirements that limit how much debt they can take on.

DSCR loans are especially popular in California, where median home prices are more than double the U.S. median ($410,800), giving investors the funding they need to acquire attractive rental property investments with a down payment. 

How Does a DSCR Loan in California Work?

To qualify for a DSCR loan, you must first understand the debt service coverage ratio (DSCR). This is how lenders measure a property’s ability to cover loan payments.

To calculate DSCR, divide the property’s net operating income (NOI) by its total debt service. Here’s the formula:

DSCR = Net Operating Income (NOI) / Total Debt Service

Where:

  • NOI is the property’s monthly rental income minus operating expenses
  • Total debt service is the monthly loan payment amount

For example, if a property has an NOI of $1,500 per month and monthly operating expenses total $1,000, the DSCR would be 1.5 ($1,500 / $1,000).

Most DSCR lenders require a DSCR of at least 1.2. However, ABL allows DSCRs as low as 1.0.

California DSCR Loan Requirements

That said, DSCR isn’t the only requirement for DSCR loans. Here are the most common criteria:

  • Credit score: Many DSCR lenders require a minimum credit score. At ABL, it’s 660.
  • DSCR: A DSCR of 1.2 or higher is often required, but ABL allows DSCRs as low as 1.0.
  • Property type: You may be limited to certain property types. For instance, DSCR loans from ABL can be used to buy single-family, small multifamily, and condo properties.
  • Rental type: Rentals can be long- or short-term. ABL DSCR loans can finance both.
  • Loan size: DSCR lenders set minimum and maximum loan amounts. At ABL, you can borrow anywhere from $85K to $2.5M with a DSCR loan.

California DSCR Loan Terms

On top of meeting your lender’s basic loan requirements, you must agree to certain loan terms:

  • Maximum LTV: Loan-to-value (LTV) is the percentage of the property’s value being financed. ABL allows LTVs of up to 80%.
  • Amortization: Amortization is how the cost of the loan is spread out over time. ABL offers DSCR loans with fixed 30-year terms.
  • Loan purpose: DSCR loans can be used in different ways. For example, ABL lets you use them for purchases, delayed purchases, rate & term refinances, and cash-out refinances. 
  • Origination fees: Origination fees (aka points) are a charge for processing the loan. ABL origination fees are 0-2%.
  • Pre-payment penalties: Some lenders charge a pre-payment penalty for paying off your loan early. ABL doesn’t.

4 Tips to Qualify for a DSCR Loan in California

Now that you understand the DSCR loan California requirements, here are tips to improve your odds of qualifying:

Target Properties with Strong Rental Income

Look for properties where the rent will comfortably exceed the monthly loan payment. This will boost your DSCR and help you qualify for loans under better terms.

Prepare a Large Down Payment

DSCR loans typically require a down payment of 20% or more. The larger your down payment, the more skin you have in the game and the less risk you pose to lenders.

Maintain Strong Credit

While DSCR loans don’t focus on your personal income, they still take into account your credit. Many lenders like ABL require a minimum FICO credit score of 660, but the higher, the better.

Set Aside Cash Reserves

Many lenders want to see that you have 6-12 months of mortgage payments in reserves to cover vacancies or unexpected expenses. 

Pre-Qualify for a DSCR Loan in California Today

To put a rental property under contract, it helps to be pre-qualified for a loan. That way, you can seize opportunities fast. At ABL, you can pre-qualify for a DSCR loan in 24 hours. Just give us some basic information about you and the property, and we’ll let you know if we’re a good fit!

From there, our local California team will guide you through underwriting and funding to ensure you experience a smooth transaction from start to finish.

Frequently Asked Questions (FAQs)

How long does it take to close a DSCR loan in California?

Most DSCR loans close within 30-45 days, though timelines can vary. At ABL, we work to close your loan as quickly as possible.

 

Can I qualify for a DSCR loan with bad credit?

While DSCR loans are more flexible than conventional mortgages, many lenders like ABL still require a minimum FICO credit score of 660. If your score is lower than this, focus on improving it before applying for a DSCR loan to increase your chances of approval.

 

Do vacation rentals (e.g., Airbnbs and VRBOs) qualify for DSCR financing?

Yes, vacation rentals can qualify for ABL’s DSCR financing. To account for the seasonality of short-term rentals, we use AirDNA data to estimate average monthly rental income from annual rental income.

 

What’s the difference between a DSCR loan and a hard money loan?

DSCR loans offer longer terms (typically 30 years) and lower rates, making them ideal for buy-and-hold investors, while hard money loans have shorter terms (12-24 months) and higher rates, designed for fix-and-flip and new construction projects. 

 

Which California cities are best for rental investments?

The best California cities for DSCR loan rental investments can fluctuate, but some of the top markets include Bakersfield, Stockton, Riverside, Sacramento, and Los Angeles.

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