Amortizing Loan

An amortizing loan is repaid through regular payments that cover interest and reduce principal, so the balance reaches zero at the end of the term. Most DSCR loans are fully amortizing over 30 years, and the amortizing payment is what the lender divides rent by.

The alternative structures change the payment and therefore the ratio. A balloon loan amortizes over a long schedule but comes due early, so the payment is the same but the risk is different. An interest-only loan has no principal in the payment for a set period, which lowers the payment and raises the DSCR while it lasts.

On $375,000 at 7.5%, the fully amortizing 30-year payment is about $2,622. Interest-only is about $2,344. With $708 of taxes and insurance, that is a DSCR of 1.20 versus 1.31 on $4,000 of rent. Lenders that offer interest-only periods usually qualify on the interest-only payment, which is why the option matters for properties near the minimum.

Further reading: Amortizing Loan on Wikipedia.