Vacant Colorado house with a For Rent sign, illustrating property qualification using projected rental income for a DSCR loan.

This is one of the most critical questions real estate investors face when financing new properties, particularly in competitive Colorado markets like Centennial, Denver, and Castle Rock: Can I use projected rental income to qualify for a DSCR loan, even if the property is vacant?

The answer is a definitive yes.

Using projected rental income is a core feature of the Debt Service Coverage Ratio (DSCR) loan program. This method allows investors in communities like Lone Tree, Parker, and Aurora to secure financing based on the property’s potential cash flow rather than the borrower’s personal income and tax returns.

The Foundation of Qualification: Property Cash Flow

DSCR loans fall into the Non-Qualified Mortgage (Non-QM) category, meaning they are not bound by the strict income verification rules of conventional Fannie Mae and Freddie Mac loans. Instead of calculating your personal Debt-to-Income (DTI) ratio, the lender focuses solely on the property’s DSCR ratio.

The formula is simple:

Formula for Debt Service Coverage Ratio (DSCR) showing that DSCR equals Gross Monthly Rental Income divided by Total Monthly Debt Service (PITIA).

If the DSCR is 1.0 or higher, the property’s income is sufficient to cover its debt. The key is how that Gross Monthly Rental Income is verified for a property that doesn’t have a lease yet.

How Lenders Verify Projected Income

For properties being purchased without an existing tenant (or with a lease that’s less than 30 days old), the projected income is established through an unbiased, third-party report completed by the appraiser.

1. The Appraisal Rent Schedule (Form 1007)

When you apply for a DSCR loan, the lender orders an appraisal that includes a specialized report called the Single-Family Comparable Rent Schedule (Fannie Mae Form 1007).

  • What it does: The appraiser analyzes comparable rental properties in the local market (e.g., in Lone Tree, Parker, and Englewood) to determine a reliable, market-supported estimate of what the subject property should rent for.
  • The Result: The number generated by the appraiser is the Projected Market Rent, and this is the figure the lender is authorized to use in the DSCR calculation.

This process ensures the income projection is grounded in verifiable market reality, giving both the lender and the borrower confidence in the investment’s cash flow potential.

What Happens If the Property Has an Existing Lease?

If the property is already rented, the process is slightly different:

  • Comparison Rule: The lender will compare the rent stated on the current, signed lease with the Projected Market Rent from the appraisal’s Form 1007.
  • The Lower of the Two: To ensure conservative underwriting, the lender will use the lower of the two figures (lease rent vs. market rent) to calculate the final DSCR ratio. This protects against an artificially high rent agreed upon with a temporary tenant.

Scaling Your Portfolio Beyond Traditional Limits

This reliance on projected income is why DSCR loans are so effective for real estate investment in Colorado. It allows you to:

  • Buy Vacant Property: You can purchase a property that needs a tenant or renovation, knowing you have financing based on its stabilized value and rent.
  • Avoid DTI Issues: You can scale your portfolio without showing W-2s or tax returns, which often become complex due to depreciation and investment write-offs.
  • Close Faster: The simplified documentation focuses on the asset, leading to a much faster and more efficient closing process.

Next Steps for Your Colorado Investment

If you are an investor in communities like Littleton, Aurora, or Greenwood Village and have found a property you are ready to finance based on its projected rental income, the next step is to get a pre-approval based on the likely DSCR.

If you would like to discuss a potential investment property or receive a pre-approval based on DSCR loan projected rental income, reach out at rbaxter@choicemortgage.com or call (303) 670-0137.

For more educational articles on investment property financing and mortgage options in Colorado, visit https://www.cohomesandloans.com/blog.

To learn more about the distinction between DSCR and traditional Debt-to-Income (DTI) qualification, which relies on tax returns, review this article detailing the differences between DSCR Loans vs. Traditional Financing for Investors.

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