DSCR Loans for California Multi-Family Properties

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Qualify for a California multi-family mortgage using the property's rental income, not your personal debt-to-income ratio.
DSCR loans offer a straightforward path for investors to purchase duplexes, triplexes, and fourplexes with competitive terms.
Understand how lenders evaluate rent potential, credit scores, and down payments to secure your next investment property loan.

How a DSCR Loan Bypasses Your Personal DTI

A Debt Service Coverage Ratio (DSCR) loan is an investor's best tool for expanding a real estate portfolio without being limited by personal income. Traditional mortgages, like conventional or FHA loans, are heavily dependent on your personal debt-to-income (DTI) ratio. Lenders analyze your W-2s, tax returns, and existing debts to see if you can afford another monthly payment.

DSCR loans operate on a completely different principle. Instead of looking at your personal finances, the lender underwrites the property itself. The core question is: Does this property generate enough income to cover its own mortgage payment?

The calculation is straightforward:

DSCR = Gross Monthly Rental Income / Monthly PITI

Gross Monthly Rental Income: This is the total rent collected from all units in the property.
Monthly PITI: This is the total proposed monthly housing expense, which includes the Principal, Interest, Taxes, and Insurance. Some lenders may also include HOA fees in this calculation.

A DSCR ratio of 1.0x means the property’s income exactly covers its expenses. Lenders almost always require a ratio above 1.0x to ensure there is a cash flow buffer. For example, if a fourplex in San Diego generates $8,000 in monthly rent and its PITI is $6,400, the DSCR is 1.25x ($8,000 / $6,400). This indicates a healthy cash flow and makes the property a strong candidate for a DSCR loan, regardless of your personal DTI.

An investor reviewing the financial performance of a multi-family property for a DSCR loan.

This approach is ideal for:

Self-employed investors with complex or fluctuating income.
Investors with high personal DTI due to existing mortgages or other debts.
Investors who want to scale their portfolio quickly without repeatedly documenting their personal financial history.

Calculating Potential Rent for Vacant Units in California

When you're buying a multi-family property, it's common for one or more units to be vacant. This doesn't stop you from getting a DSCR loan. Lenders don't rely on guesswork to determine potential income; they require a professional, data-driven assessment from a licensed appraiser.

To calculate the potential rent for vacant units, the appraiser will complete a Small Residential Income Property Appraisal Report (Form 1025) for 2-4 unit properties. A key part of this report is the Comparable Rent Schedule. The appraiser analyzes recently rented, similar properties in the immediate vicinity to establish a fair market rent for your vacant unit.

Here’s what they look for in comparable rentals:

Proximity: Properties located as close as possible, ideally within the same neighborhood.
Size and Layout: Similar square footage, bedroom count, and bathroom count.
Condition and Amenities: Comparable age, condition, updates, and features like parking, in-unit laundry, or outdoor space.
Recent Data: Rental agreements signed within the last 6-12 months.

For example, if you are buying a duplex in Oakland with a vacant two-bedroom unit, the appraiser will find three other recently rented two-bedroom units nearby. If those units rented for $2,800, $2,950, and $2,850, the appraiser might assign a fair market rent of $2,875 to your vacant unit. This figure, not a hypothetical number you provide, is what the lender will use in the DSCR calculation along with the rent from the occupied unit.

Do California Rent Control Laws Negatively Impact DSCR Calculations?

Yes, rent control laws in California can significantly impact DSCR loan approvals, and it's a common reason for denial. Cities like Los Angeles, San Francisco, and Oakland have strict regulations that limit how much a landlord can increase rent annually and under what conditions a tenant can be evicted.

Lenders view rent control as an added layer of risk. Here's why:

Capped Income Growth: The property's income potential is legally restricted. While taxes and insurance costs will likely rise over time, the rental income may not keep pace, potentially squeezing cash flow and lowering the DSCR in the future.
Below-Market Rents: If the property has long-term tenants paying rent that is well below the current market rate, the lender must use the actual, lower rent being paid for the DSCR calculation. They cannot use the higher market rent from the appraiser's report for an occupied unit.

Let’s say you’re buying a duplex where the market rent for each unit is $3,500. However, one unit has a tenant who has lived there for 15 years and pays only $1,800 due to rent control. For the DSCR calculation, the lender will use $5,300 ($3,500 for the vacant unit + $1,800 for the occupied unit) as the gross monthly income, not the full market potential of $7,000. This lower income figure could cause the DSCR to fall below the lender's minimum requirement.

Some lenders are more conservative than others when dealing with rent-controlled properties. They may require a higher DSCR (e.g., 1.25x instead of 1.15x) or a larger down payment to offset the perceived risk.

Minimum DSCR Ratios for a Duplex vs. a Fourplex

Lenders adjust their minimum DSCR requirements based on the property type, loan-to-value (LTV), and the borrower's credit score. Generally, properties with more units are seen as having slightly less risk because vacancy in one unit has a smaller impact on the overall cash flow.

Duplex (2 Units): Minimum DSCR often starts around 1.15x to 1.20x. With only two income streams, the loss of one tenant cuts the property's gross income in half. Lenders want a healthier cash flow buffer to compensate for this concentrated risk.
Triplex & Fourplex (3-4 Units): Minimum DSCR can be lower, often starting at 1.0x to 1.15x. With four units, if one becomes vacant, you still retain 75% of your gross rental income. This diversification makes the investment more stable in the lender's eyes.

A modern fourplex building, representing an ideal investment for a DSCR loan.

Example Scenario:

Duplex Purchase: A property with a PITI of $4,000 would need to generate at least $4,600 in monthly rent to meet a 1.15x DSCR requirement.
Fourplex Purchase: A property with a PITI of $7,000 might only need to generate $7,000 in monthly rent to qualify with a lender allowing a 1.0x DSCR.

It is crucial to remember that these are just starting points. A borrower with a 780 credit score putting 30% down might qualify with a 1.0x DSCR on a fourplex, while a borrower with a 680 credit score putting 25% down may be required to show a 1.20x DSCR for the same property.

Can I Use a DSCR Loan If I Plan to Live in One of the Units?

No, you generally cannot use a DSCR loan if you plan to live in one of the units. This practice, known as house-hacking, is a fantastic strategy for building wealth, but it is not what DSCR loans are designed for.

DSCR loans are classified as business-purpose loans intended for non-owner-occupied investment properties. When you sign the loan documents, you are attesting that you will not use the property as your primary residence. Lenders verify this and have strict rules against it.

If you intend to house-hack a multi-family property in California, you should look at owner-occupied financing options like:

FHA Loan: Allows you to purchase a 2-4 unit property with as little as 3.5% down.
VA Loan: Eligible veterans can purchase a 2-4 unit property with 0% down.
Conventional Loan: Allows multi-family purchases with down payments as low as 5% for a duplex or more for 3-4 unit properties.

For these loans, you can use the projected rent from the other units to help you qualify, but the underwriting will still be based primarily on your personal DTI.

Credit Score and Down Payment Requirements

While DSCR loans don't look at your personal income, they do have requirements for your credit history and the amount of capital you bring to the transaction. These loans are not for borrowers with poor credit or little cash on hand.

Credit Score: The absolute minimum credit score is typically 640. However, to get the best interest rates and most favorable terms (like a lower DSCR ratio requirement), a score of 720 or higher is strongly recommended. Borrowers with scores below 680 should expect to pay a higher interest rate and may need to make a larger down payment.
Down Payment: The standard minimum down payment for a DSCR loan is 20%. This results in an 80% loan-to-value (LTV). However, many investors choose to put down 25% or 30% for several reasons:
- Better Terms: A larger down payment reduces the lender's risk, often resulting in a lower interest rate.
- Easier Qualification: A lower loan amount means a lower monthly PITI, which makes it easier to meet the required DSCR ratio.
- No PMI: Unlike conventional loans with less than 20% down, DSCR loans do not have private mortgage insurance (PMI), but pricing adjusts based on LTV.

Lenders also require you to have cash reserves, which is liquid cash left over after closing costs and the down payment. This typically needs to be enough to cover 3-6 months of the property's PITI, demonstrating you can handle a temporary vacancy or unexpected repair.

Getting a DSCR Loan for a Property That Needs Minor Renovations

It is possible to finance a multi-family property that needs minor, non-structural work using a DSCR loan, but it requires the right lender and approach. Lenders will not approve a loan on a property that is uninhabitable or has significant safety issues.

For properties needing cosmetic updates (like new paint, flooring, or appliances), you have a couple of options:

Appraisal "Subject To" Repairs: The appraiser will note the required repairs in their report and value the property as if the repairs were already completed. The lender may then require a repair holdback. This means a portion of the loan funds is held in an escrow account at closing. You complete the repairs after closing using your own money, and once an inspector verifies the work is done, the lender releases the holdback funds to you.
Financing a Lower Purchase Price: You can negotiate a lower purchase price with the seller to account for the needed repairs. You would then use your own cash to complete the renovations after you take possession of the property. This is the simplest path as it doesn't add complexity to the mortgage process.

DSCR loans are not renovation loans like an FHA 203(k) or Fannie Mae HomeStyle loan. They are intended for properties that are rent-ready or very close to it. If a property requires major work like foundation repair, a new roof, or re-wiring, a DSCR loan is not the right tool. In that case, you would need to use a short-term bridge loan or hard money loan for the purchase and renovation, then refinance into a long-term DSCR loan once the property is stabilized and rented.

Steps to Get Pre-Approved for a Multi-Family DSCR Loan

Getting pre-approved for a DSCR loan is a focused process centered on the property's financials and your creditworthiness as an investor. Here are the exact steps:

Consult with a Mortgage Strategist: Find a mortgage broker or lender who specializes in DSCR and other non-QM (non-qualified mortgage) loans. They have access to the lenders who offer these products and understand their specific guidelines.
Provide Initial Investor Information: You will need to provide basic personal information for a credit check and asset verification. This includes:
- Your full legal name and address.
- Your Social Security Number for a credit pull.
- Bank statements or brokerage account statements to verify you have funds for the down payment, closing costs, and reserves.
Identify a Target Property: Unlike a pre-approval for a primary home, a DSCR pre-approval is property-specific. You need to have a property under contract or at least a specific address in mind. The lender needs property details to run the numbers.
Submit Property Details for Analysis: Provide the lender with the property address, purchase price, number of units, and a rent roll (a document showing current rents for occupied units). If any units are vacant, inform the lender so they know an appraiser will need to determine market rent.
Initial DSCR Calculation: The lender will perform a preliminary DSCR calculation using the estimated taxes, insurance, and the provided rent roll. If the numbers work, they will issue a pre-approval letter. This letter shows sellers you are a serious buyer with financing lined up.
Formal Application and Appraisal: Once you are in contract, you will complete the formal loan application. The lender will then order the full appraisal (Form 1025), which will provide the final, official market rent values and property valuation that will be used for the underwriting decision.

If you're ready to explore a DSCR loan for your next California multi-family investment, the first step is a conversation. A mortgage strategist can review the property's details and your investment goals to find the right loan product for your portfolio.

Ready to see how a DSCR loan can help expand your real estate portfolio? Connect with a mortgage strategist to analyze your investment property's potential and Apply now to get started.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping real estate investors and clients with unique financial situations. He expertly crafts smart, strategic, and stress-free mortgages for investment properties by leveraging a vast network of over 100 lenders to secure competitive rates on products like DSCR loans. Praised for exceptional customer service, David has helped hundreds of clients build their portfolios with a 97% satisfaction rate.