A
pplying for a conventional mortgage is a tedious, paperwork‑heavy ordeal that forces buyers to hand over bank statements, tax returns, employment records, and investment summaries. The process feels intrusive, and the waiting period for an underwriter’s approval can be frustrating. A small‑scale investor, however, can sidestep much of this hassle by using a debt‑service coverage ratio (DSCR) loan.
DSCR loans focus on the property’s cash flow rather than the borrower’s personal credit. A landlord shows the lender that the rental income will cover the mortgage payment plus taxes, insurance, and other operating costs. If the rent exceeds the debt service, the loan is approved. The borrower typically puts down at least 20 % of the purchase price, which reduces the lender’s risk and gives the owner skin in the game.
During the pandemic, low rates and rising home prices made DSCR financing attractive. Influencers on TikTok and other platforms popularized the BRRRR strategy—Buy, Rehab, Rent, Refinance, Repeat—using DSCR loans to acquire, renovate, and refinance properties, then repeat the cycle. Institutional investors began buying DSCR loans from private lenders, packaging them into securitized portfolios that could be sold as bonds. By 2022, DSCR lenders had issued more than $44 billion in loans, up from $5.6 billion in 2019.
The appeal of DSCR loans lies in speed and flexibility. Lenders can close quickly, often without a full background check on the borrower, and the loan can be used for multiple properties. Small‑to‑mid‑size landlords—those who own a handful of units or are looking to expand—have been the primary users. They include independent investors, social‑media entrepreneurs, and seasoned property managers who want to grow without the constraints of conventional financing.
However, the market has shifted. The Federal Reserve’s rate hikes to curb inflation have increased borrowing costs. Properties purchased during the pandemic carry higher loan balances and larger monthly payments. Meanwhile, rent growth has slowed: single‑family rents rose only 4.3 % year‑over‑year in March 2023, down from 13.3 % the previous year. As a result, many DSCR borrowers find their rental income insufficient to cover debt service.
Delinquency data from Cotality shows that serious delinquencies—payments 90 days late or foreclosure proceedings—have nearly quadrupled since mid‑2022. While the absolute dollar amount of troubled loans remains small, the percentage increase signals tightening economics for debt‑laden landlords. Securitized DSCR loans in serious delinquency rose from about 0.5 % in 2022 to nearly 2 % in August 2023. By contrast, conventional loans see only about 1 % in serious delinquency.
Several factors contribute to the spike. Some borrowers took out “sub‑unity” DSCR loans, where the coverage ratio is below 1. They bet on future rent increases or property appreciation to cover the shortfall. Others refinanced conventional loans into DSCRs to tap higher home prices for cash‑out, only to be locked into higher rates that required higher rents. The correlation between cash‑out refinances and delinquency is clear: borrowers over‑leveraged themselves when rates rose, but rents did not keep pace.
Despite the uptick, DSCR lending remains robust. In 2023, lenders issued more than $38 billion in DSCR loans for over 100,000 properties. By October, another $32.8 billion had been disbursed for nearly 89,000 units. Major mortgage lenders, including United Wholesale Mortgage and Rocket Mortgage, now offer DSCR products. The industry’s growth is partly driven by the continued preference for renting over buying. Research by Zelman shows that the rent‑vs‑buy calculus favors renters more than it has since the early 1980s, supporting the rental market’s resilience.
Rent growth, however, is modest. In August, single‑family rents increased only 1.4 % year‑over‑year, a 15‑year low. While some landlords face stagnant or falling rents, many delinquent borrowers can still sell their properties at appreciated values to satisfy the loan. If well‑funded investors retreat and distressed assets flood the market, first‑time buyers may find better opportunities for entry‑level homes.
For aspiring “BRRRRers” or FIRE‑movement participants, the era of cheap money has ended. High rates and slower rent growth mean that the low‑cost financing that once made rapid scaling possible is no longer available. Success now depends on disciplined underwriting, realistic rent projections, and a willingness to accept higher down‑payment requirements.
In short, DSCR loans enabled a wave of small landlords to build real‑estate portfolios quickly and with minimal scrutiny. The market’s recent turbulence—rate hikes, slower rent growth, and rising delinquencies—has exposed the fragility of over‑leveraged positions. Yet the product remains popular, supported by institutional investors, securitization, and a rental market that still outpaces home ownership for many. The industry’s future will hinge on tighter underwriting standards, more realistic cash‑flow assumptions, and the ability of lenders to balance speed with risk.
