DSCR loans in California: what lenders ask, and what the state changes

The hand-me-down wetsuit: what a DSCR loan in California measures

You've found the rental, and the listing packet looks great. A tidy rent roll, last year's tax bill, an insurance premium that seems almost polite. Those are the seller's numbers, though, and they fit the seller the way a hand-me-down wetsuit fits the last surfer: snug on them, and not cut for you. (The Pacific is colder than the postcards, so the fit matters.)

A DSCR loan is a business-purpose mortgage on a rental, and the lender sizes it on the rent rather than your pay stubs or tax returns. DSCR stands for debt service coverage ratio: the property's monthly rent divided by what it costs to own each month, meaning principal, interest, property taxes, insurance and any HOA dues. The rent figure usually comes from the appraiser, who compares nearby rentals and fills in Fannie Mae's Form 1007 for a single home or Form 1025 for two to four units.

In California, two lines move that ratio more than buyers expect. The tax bill is reset to market value when you buy, and state law may limit how fast the rent can rise once a tenant is in place. So the suit gets refitted, line by line, to you. A made-up example: rent of $3,400 against a monthly cost of $3,100 is a ratio of about 1.10. Try your own numbers in the DSCR calculator.

1. 1

   Figure the tax bill fresh

   Base it on the market value when you buy, not on the seller's bill.

2. 2

   Price insurance early

   Get fire coverage quotes and ask about earthquake cover, which standard policies usually leave out.

3. 3

   Check the rent rules

   Find out whether the statewide cap or a city ordinance covers the unit.

4. 4

   Divide rent by monthly cost

   That ratio is the first number a DSCR lender looks at.

5. 5

   Plan your cash

   Add the down payment, reserves, any transfer tax you agree to pay and the tax bill that follows a purchase.

Who this wetsuit fits

Where California takes in the seams

The seams are the tax bill, the rent, the insurance and the cash at closing. None of them is hard on its own. They just don't come pre-tailored.

Property taxes. Proposition 13 sets the base property tax at 1% of assessed value, plus whatever voter-approved bonds apply where the property sits, and it covers rentals as well as homes. When a property sells, the county reassesses it to market value as of the sale. After that, the assessed value is adjusted for inflation by no more than 2% a year until the next sale or new construction. So the seller's bill isn't your bill: build the tax line from the new value. (If the seller has owned the place for ages, their bill can look like a typo. It's still not yours.) If the new value is higher, the county also sends a supplemental tax bill for the rest of the tax year. The homeowners' exemption won't help here, because rentals don't qualify for it.

Rent. California's Tenant Protection Act limits rent increases on many rentals to 5% plus the local change in the cost of living, or 10%, whichever is lower, over any 12 months. The limit runs from the lowest rent in the past year, and when a unit turns over to a new tenant you set the starting rent. Some properties are exempt, including housing whose certificate of occupancy is less than 15 years old, and a single-family home or condo whose owner isn't a corporation, a REIT or an LLC with a corporate member, as long as tenants get the written notice the law spells out. The statewide cap is set to run until January 1, 2030. Many cities and counties have tighter rent rules of their own, though the Attorney General notes those local caps don't reach buildings with a certificate of occupancy issued after February 1, 1995, or most single-family homes and condos. (Worth a second read. Most people give it one.) A lender sizes your loan on today's rent; these rules shape how fast that rent can grow.

Insurance. The California Department of Insurance notes that earthquake and flood are usually excluded from standard property policies, so ask about them when you price coverage. (The ground here has opinions.) Where private insurers see a property as high risk and won't write it, the California FAIR Plan, the state's insurer of last resort, offers dwelling policies for one-to-four-unit homes rented to a tenant for at least a year, and for seasonal rentals. Its basic policy covers fire, lightning, internal explosion and smoke, and the FAIR Plan itself suggests adding other policies for fuller coverage. Whatever you buy goes into the monthly cost the ratio uses.

Transfer tax. A county can charge a documentary transfer tax of 55 cents per $500 of value on the deed when a property sells, and a city can add its own. It's charged on the deed, not on your loan, and it's paid when the deed is recorded. On a made-up $800,000 sale, the county tax at that rate is $880. It changes the cash at closing, not the monthly ratio.

Short-term rentals. Cities can set their own short-term rental rules. In the City of Los Angeles, for one, a stay of 30 consecutive days or less is a short-term rental, only a host's own primary residence can be registered for it, and hosts handle the city's transient occupancy tax. A home you don't live in fits a long-term lease plan there instead.

Off the rack: California DSCR loan requirements lenders publish

No agency writes these rules. A DSCR loan on a one-to-four-unit rental sits outside Fannie Mae, Freddie Mac and the government home-loan programmes, and lenders file it as non-QM, so each lender sets its own terms and they don't match. Think of a rack with every size on it, and no two labels agreeing on what "medium" means.

Down payment. On a purchase, lenders publish 20% down most often, and some publish 15% for files with higher credit scores. Some ask 25% down on a condo or a two-to-four-unit building. None of the lenders we read publishes a regular DSCR purchase programme with no money down.

Credit score. Published minimum scores run from 620 to 680.

Ratio. Some lenders want 1.00 or higher, published programmes go as low as 0.75, and at least one sets no minimum at all.

Loan size. Published minimum loan amounts mostly run from $100,000 to $150,000.

Terms. A 30-year fixed loan is the standard term lenders publish, and some also publish 40-year, interest-only and adjustable options. Many DSCR loans charge a fee if you pay the loan off in the first few years; the length and size of that fee differ by lender.

Cash-out. On a cash-out refinance, lenders most often publish a 75% loan-to-value limit.

Title. Many lenders let you borrow in your own name or through an LLC. The rent cap's single-family and condo exemption doesn't apply when the owner is a corporation, a REIT or an LLC with a corporate member (Civil Code 1947.12).

Reserves. Many lenders want savings left after closing, and the amount varies.

Pricing. DSCR pricing is set file by file, so there isn't one California rate. Lenders that publish what drives it name the credit score, the down payment and the ratio, and at least one also names the prepayment term.

Building a collection past the state line? We also cover DSCR loans in Texas and DSCR loans in Florida.

Where it fits, where it pinches: California DSCR pros and cons

Nobody should buy a California rental on someone else's numbers. The tax bill, the rent and the insurance were all cut for the last owner, and the last owner isn't the one signing. Refit the suit to you, and let the rent make its own case.

Questions people ask

What is a DSCR loan in California?

It's a business-purpose mortgage on a rental of one to four units that qualifies on the property's rent instead of your income. Lenders divide the monthly rent by the monthly cost: principal, interest, property taxes, insurance and any HOA dues. In California, the reset tax bill and the rent rules often decide how that ratio turns out, so build it from your numbers, not the seller's.

What are the DSCR loan requirements in California?

Each lender sets its own, because a DSCR loan on a one-to-four-unit rental sits outside Fannie Mae, Freddie Mac and the government programmes. Lenders publish 20% down most often, minimum credit scores from 620 to 680, and minimum loans mostly from $100,000 to $150,000. Minimum ratios run from 1.00 or higher down to 0.75, and at least one lender sets none.

How much do I need to put down on a California DSCR loan?

On a purchase, 20% down is the figure lenders publish most often, and some publish 15% for higher credit scores. Some ask 25% on a condo or a two-to-four-unit building. We found no lender publishing a regular zero-down DSCR purchase. On a cash-out refinance there's no down payment (you already own the place); 75% of the value is the limit lenders publish most often.

Does Proposition 13 apply to a rental property?

Yes. A rental is reassessed to market value when it sells, then its assessed value can rise no more than 2% a year until the next sale or new construction. The base tax is 1% plus any voter-approved bonds where it sits, and a higher new value brings a supplemental tax bill. Rentals don't qualify for the homeowners' exemption, so budget from the new value, not the seller's bill.

Does California's rent cap affect a DSCR loan?

It can shape the rent over time. The Tenant Protection Act limits increases on covered units to 5% plus the local change in the cost of living, or 10%, whichever is lower, over 12 months. Some properties are exempt, including newer housing and some single-family homes and condos with the required notice. The statewide cap is set to run until January 1, 2030.

What are DSCR loan rates in California?

DSCR pricing is set file by file, so there isn't one California rate to quote. Lenders that publish what drives it name the credit score, the down payment and the ratio, and at least one also names the prepayment term. Kelly can compare lenders on your file with you.

Can I use a California DSCR loan for a short-term rental?

Several lenders publish short-term rentals as eligible, but the city's rules come first. In the City of Los Angeles, for one, a stay of 30 consecutive days or less is a short-term rental and only a host's own primary residence can be registered for it. Check the city's rules before you plan on short-stay income.

What closing costs are different in California?

A county can charge a documentary transfer tax of 55 cents per $500 of value on the deed when a property sells, and a city can add its own. It's paid when the deed is recorded, so it changes your cash at closing, not the monthly ratio. A supplemental property tax bill can also follow a purchase, which is one more reason to plan your cash early.