A "good DSCR ratio" for a DSCR Loan is dependent on many factors, as the flexibility and range of DSCR Loans means financing for a large variety of real estate investing strategies and scenarios. Commonly, a “good DSCR ratio” is 1.25x or higher, as this indicates comfortably positive cash flow, with a healthy profit margin and room to still cover payments in case of issues (such as vacancies or expenses for unexpected repairs). The 1.25x DSCR ratio is also a common real estate lending industry standard “floor” or DSCR ratio minimum for commercial real estate lenders and business lenders, although this floor is not applicable for DSCR Loans. There can be many reasons why residential real estate investors can find success with properties with DSCR ratios under the 1.25x barrier. Lending on these properties can make sense for a DSCR Lender from a risk-reward standpoint too, especially when other aspects of the specific loan scenario are strong.

It’s also important to remember that DSCR is based on the lender’s underwritten revenue, which can be different among lenders for some scenarios, particularly in less vanilla deals like for short term rentals or properties with significantly above- or below-market rents, where lender judgment and methodology can vary. This means two lenders can calculate different DSCRs for the same deal, which can lead to different pricing tiers or even different eligibility outcomes. Further, expenses are limited to PITIA, and the DSCR Lender's formula doesn't include other typical expenses like landscaping or management costs, that smart investors should factor into their own personal calculations.

The DSCR ratio gives the lender one clear signal: How reliant is this loan on the borrower’s personal resources? (or more accurately, how strong is the likelihood that the individual’s personal resources won’t be needed to cover the monthly payments) The lower the DSCR ratio, the more likely the investor will have to step in to make PITIA payments, a key indicator of a higher risk of default. The higher the DSCR ratio, the more self-sustaining the property and the likelihood the borrower would have to tap personal funds for PITIA is much lower, indicating a much lower risk of default.

The DSCR Ratio bucket a DSCR Loan falls into has a smaller effect on overall interest rate and loan terms than which LTV or FICO bucket the loan lands in. Generally, borrowers will get slightly better terms (lower rate and/or fees) with DSCRs above 1.15x or 1.25x, but the difference isn't usually very large (generally around a rate improvement of only 0.25% or so). Conversely, with DSCR ratio buckets under 1.00x, the “penalties” are pretty harsh, with lenders often demanding much higher rates or fees for sub-1.00x DSCR Loans to compensate for the heightened risk. When generating terms for DSCR Loans with DSCR ratios under 1.00x, whether in the 0.75x-0.99x range or the “no ratio” DSCR Loans with DSCR ratios under 0.75x, the lender generally compensates with sharper LTV restrictions (such as maximum LTVs for these scenarios around 65.0% vs. 80.0% otherwise) and more moderate hits to pricing.

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