DSCR Loan Down Payment: How Much You Need and How the Ratio Sets It

The minimum down payment on a DSCR loan is 20 to 25% of the purchase price. The real minimum is often higher, because the down payment has to be large enough that the rent covers the resulting payment at the lender’s required ratio.

That second rule is what makes DSCR down payments different from conventional ones. On a conventional loan, 25% down is 25% down. On a DSCR loan, 25% down is the starting point, and the rent decides whether it is enough.

The published minimums

Most DSCR lenders list these LTV caps:

• Purchase: 75 to 80% LTV, so 20 to 25% down. The 80% tier usually needs a 1.25 ratio and a credit score of 720 or higher.
• Rate-and-term refinance: 75 to 80%.
• Cash-out refinance: 70 to 75%, lower on two to four units.
• Ratios under 1.0: 65 to 70%, so 30 to 35% down.
• Foreign nationals: 65 to 70%.

Lower credit scores, lower ratios, condos, multi-unit properties and short-term rentals each tend to shave 5% off the maximum LTV. A 660 score on a fourplex with a 1.05 ratio might cap at 65% even though the lender advertises 80%.

How the ratio sets the real minimum

Work the DSCR formula backwards. The lender needs rent divided by PITIA to equal at least its target ratio. Rent is fixed. Taxes, insurance and HOA are fixed. The only piece that moves with the down payment is principal and interest.

So the maximum payment is rent divided by the target ratio, minus taxes, insurance and HOA. Divide that by the payment on $1 of loan at your rate and term, and you have the largest loan the rent supports. Price minus that loan is your minimum down payment.

An example. A $500,000 property rents for $4,000. Taxes are $6,000 a year and insurance $2,500, so $708 a month together. The rate is 7.5% over 30 years, and the lender wants 1.25.

• Maximum PITIA: $4,000 / 1.25 = $3,200
• Maximum principal and interest: $3,200 minus $708 = $2,492
• Payment factor at 7.5% over 30 years: about $6.99 per $1,000 borrowed
• Maximum loan: $2,492 / $6.99 × $1,000 = about $356,000
• Minimum down payment: $500,000 minus $356,000 = about $144,000, or 29%

At 25% down the loan would be $375,000 and the ratio 1.20. Not enough for this lender’s 1.25 tier, so the down payment rises to 29%. The DSCR loan calculator does this solve automatically and shows the answer as “minimum down payment.”

What pushes the down payment up

Anything that lowers rent or raises the payment. In rough order of how often they bite:

• Low rent relative to price. In markets where a $500,000 house rents for $2,800, the ratio at 75% LTV is well under 1.0 and the down payment needed to reach 1.0 is 40% or more.
• High property taxes. A 2% tax rate instead of 1% on a $500,000 property adds $417 a month to PITIA and knocks about 0.14 off the ratio.
• HOA dues. Condos with $400 dues routinely need 5 to 10% more down than an equivalent single-family home.
• Insurance in coastal or wildfire markets. A $5,500 premium instead of $2,500 is $250 a month.
• Higher rates. Each half point of rate at 75% LTV on $500,000 costs about $130 a month and roughly 0.05 of ratio.

The purchase price pages show how the ratio moves with down payment at each price point, so you can see where your market lands.

Where the money can come from

Your own seasoned funds are accepted everywhere. Beyond that, lenders differ:

• Gift funds: accepted at some lenders with a gift letter and transfer paper trail, refused at others.
• Business account funds: usually accepted if you own the business, with a letter confirming the withdrawal will not harm operations.
• 1031 exchange proceeds: accepted, and common.
• HELOC or cash-out from another property: accepted, and the new payment on that debt is not counted against you because there is no DTI.
• Seller credits: usually capped at 2 to 3% and applied to closing costs, not the down payment.
• Borrowed funds and unsecured loans: generally not accepted as down payment.

Funds typically need to be in your account for 30 to 60 days or fully sourced. Large recent deposits will draw a request for documentation.

Down payment versus rate: the trade

Every extra 5% down does two things. It moves you into a lower LTV pricing tier, and it raises the ratio, which may move you into a better ratio tier. Both lower the rate.

On a $500,000 purchase, going from 25% to 30% down is $25,000 more cash. If that moves the ratio from 1.20 to 1.27 and the rate drops by 0.375 points, the payment on the smaller loan falls by roughly $265 a month, or $3,200 a year. That is about a 13% cash-on-cash return on the extra $25,000 before you count the principal you are no longer borrowing.

Whether that beats deploying the $25,000 into another property is your call. The point is that on a DSCR loan the down payment is a pricing lever, not just an entry fee.

Reserves are on top

After the down payment and closing costs, lenders want three to six months of PITIA left in liquid accounts. On a $3,330 payment that is $10,000 to $20,000. Budget for it, because a file that is short on reserves at closing does not close.

The full list of what lenders ask for is in DSCR loan requirements.