DSCR Second Mortgage: How Lenders Size a Second on Rental Cash Flow

A DSCR second mortgage is a second-lien loan on a rental that a lender sizes on the property's rent instead of the borrower's personal income. Yes, a DSCR loan can be a second mortgage. The main change from a DSCR first is that the second payment gets added to the first before the lender compares debt to rent.

What DSCR measures

DSCR is the debt service coverage ratio: monthly rent divided by the monthly payment on the property. A 1.00 means rent exactly covers the payment. Our guides on what a DSCR loan is and how to calculate DSCR cover the basics, and the DSCR calculator runs your own numbers.

On a first mortgage the payment in the formula is that one loan's payment, including taxes, insurance and any association dues. With a second lien on the property, the lender has two loans to count.

How a DSCR second works

A second mortgage records behind the first mortgage, which stays in place. It can be a lump sum paid at closing (closed-end) or a line of credit you draw on. Our guide to a second mortgage on an investment property explains the structure. A DSCR second is typically sized by two limits:

• Combined loan-to-value. All liens on the property, divided by its value. Read CLTV explained. The first mortgage uses up part of the room under the cap.
• Combined debt service. The first mortgage payment plus the new second payment, compared with the rent. A bigger second lowers the ratio.

Whichever limit is tighter on your rental sets the size of the second. Each lender sets its own CLTV cap and minimum DSCR, so ask. USA Mortgage's minimum is 1.00, covered below.

Worked example: combined debt service

This is an example with placeholder numbers. It is not a USA Mortgage rate, payment or quote.

• Monthly rent: $3,000.
• First mortgage payment, with taxes and insurance: $1,800. DSCR on the first alone: $3,000 / $1,800 = 1.67.
• Placeholder second mortgage payment: $500. Taxes and insurance are counted once, inside the first mortgage payment in this example.
• Combined payment: $1,800 + $500 = $2,300. Combined DSCR: $3,000 / $2,300 = 1.30.

Adding the second took the ratio from 1.67 to 1.30. As a general example, if a lender required a 1.20 minimum, the combined payment could be as high as $3,000 / 1.20 = $2,500, which leaves room for a second payment up to $2,500 - $1,800 = $700. At USA Mortgage's 1.00 minimum, the combined payment could be as high as $3,000 / 1.00 = $3,000, which leaves room for a second payment up to $3,000 - $1,800 = $1,200, before the CLTV cap is applied. Change the rent or the payments and the answer changes. The second mortgage calculator lets you try your own figures.

What to check on your own rental

• The rent figure. Whether a lender uses a lease or a market rent schedule is that lender's rule. Ask which one applies to your deal.
• Your first mortgage. It may restrict a junior lien. See second lien behind a DSCR or conventional first.
• Your first mortgage payment. The first payment is part of the combined number. If you are weighing a refinance instead, compare the two in second mortgage vs cash-out refinance.
• The minimum loan size. If the room under the CLTV cap or the DSCR limit is smaller than the lender's minimum, the deal does not fit.

Where USA Mortgage fits

USA Mortgage's second mortgage program has these typical terms, subject to underwriting: $50,000 to $1,000,000, as a lump sum or a line of credit, first or second lien, a fixed rate from 6.99%, 660 minimum FICO, up to 80% CLTV on investment properties, 3-4 week close, and a prepayment penalty: 0 to 5 years. The minimum debt service coverage is 1.00. The property is a 1 to 4 unit residential investment property, non-owner-occupied, worth at least $100,000. Short-term rentals (Airbnb, VRBO) are eligible and that rental income counts. The borrower can be an individual or an entity such as an LLC. Every loan is conditional on the borrower and the property, and some files may be placed with partner lenders. Apply now or talk to us.

Our DSCR rental loan is a separate program; see its page for terms. This guide is about the second-lien side of the market.

Business-purpose lending only, on non-owner-occupied investment property. Not a commitment to lend. Terms shown are typical and subject to underwriting.