Fetti Financial Services
We Do Money…
Fetti Financial Services
We Do Money…
Lender & broker · Fetti Financial Services LLC · NMLS #2267023
A DSCR loan qualifies your California rental on the property's own cash flow instead of your personal income, W-2s or tax returns. The arithmetic is simple — the rent has to cover the payment — but in California the payment side of that ratio carries costs that do not exist in most states, and that is where deals are won or lost. Below is what actually moves a California DSCR number, written by the people who underwrite them.
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DSCR is the property's rent divided by its full housing payment — principal, interest, taxes, insurance and any HOA dues, the figure lenders call PITIA. A 1.00 means the rent exactly covers the payment. A 1.25 means the rent covers it with 25% to spare.
Two details decide more California files than anything else. First, most programs use the lesser of the actual lease rent and the appraiser's market-rent opinion on Form 1007, so an above-market lease from a friendly tenant will not carry a deal. Second, the taxes and insurance in that denominator are the FUTURE numbers, not the seller's current bill — which in California is where the surprise lives.
Under Proposition 13, a property's assessed value is capped while ownership stays the same, rising no more than 2% a year. When it sells, the assessment resets to the new purchase price. A building held by the same family for twenty years can be assessed at a fraction of what you are paying for it.
Investors routinely underwrite a deal using the tax bill on the MLS sheet, get a DSCR that works, and then watch the ratio collapse when the lender reassesses at roughly 1.1–1.25% of the purchase price. On a $900,000 duplex bought from a long-time owner, the difference between the old assessment and the reset one can be several hundred dollars a month of PITIA — which is often the entire margin between a 1.15 DSCR and a 0.95.
We underwrite California files on the reset number from the first conversation. If a lender quotes you off the seller's current taxes, the ratio you are being shown is not the ratio your file will close at.
California property insurance has repriced hard in wildfire-exposed areas, and several national carriers have pulled back from writing new policies in parts of the state. Where the admitted market will not write, owners land on surplus-lines coverage or the California FAIR Plan, usually paired with a separate wrapper policy for the perils FAIR Plan does not cover.
That premium sits directly in the DSCR denominator. A property in a high-hazard severity zone can carry insurance several times what an equivalent building costs to insure in the Central Valley — enough to move a ratio by a tenth or more on its own. Get a real quote early. An estimate carried over from another state is the fastest way to have a file re-priced late.
In newer California developments — much of the Inland Empire, Sacramento's suburbs, parts of the Central Valley — a Mello-Roos community facilities district levies an additional annual charge that funds the infrastructure the tract was built on. It appears on the tax bill and counts fully in PITIA.
Two identical houses on the same street, one inside the district and one outside, can underwrite to materially different ratios. Pull the actual tax bill, not an estimate from the assessed value.
California's statewide Tenant Protection Act caps annual rent increases on many older properties and requires just cause for most terminations. Los Angeles, San Francisco, Oakland, Santa Monica and others layer stricter local ordinances on top, often with lower caps and their own registration requirements.
For a DSCR file this matters in two ways. An in-place tenant well below market cannot simply be raised to market to make the ratio work, so the lesser-of test bites harder. And on a property where market rent is far above the legal rent, the appraiser's 1007 and the actual lease can diverge sharply — expect underwriting to use the lease.
California has spent several legislative sessions making accessory dwelling units easier to permit, and a legally permitted ADU with its own lease adds income to the numerator. On a single-family property in Los Angeles or San Diego, a permitted ADU is frequently what lifts a marginal ratio over the line.
The word doing the work is permitted. Unpermitted conversions — very common in older LA housing stock — generally cannot be counted, and an appraiser who flags one can also reduce the value conclusion. If the income matters to your ratio, confirm the permit before you write the offer.
California's price-to-rent relationship means plenty of good coastal properties simply do not cash flow at closing. That is not automatically a dead file. Programs exist for ratios below 1.00, and some will lend with no ratio requirement at all — the trade is lower leverage, a stronger credit profile, and more reserves.
The other levers are structural: a larger down payment lowers the payment and lifts the ratio directly; an interest-only period reduces the denominator during the term; buying down the rate trades cash at closing for a permanently better ratio. Which of those is cheapest depends on how long you intend to hold, and it is worth modelling before you pick.
There is one more lever the levers above do not cover: buy where the ratio clears. DSCR is a business-purpose product and we place it in all 50 states, so a California investor whose coastal numbers will not work is not stuck — a great many of them buy in markets with a friendlier price-to-rent relationship, and Florida is the one we are asked about most. If that is the direction you are leaning, the same arithmetic runs on very different inputs there: see DSCR loans in Florida.
DSCR loans are business-purpose credit and close in an entity as a matter of course, which keeps the financing off your personal credit report and is standard for portfolio builders.
Budget for California's cost of holding that entity: the state levies an $800 annual minimum franchise tax on LLCs, plus a graduated fee once gross receipts pass certain thresholds. It is not a loan cost, but it is a real annual carry that investors coming from other states regularly forget when they model a California hold.
Because these are business-purpose loans on non-owner-occupied property, they are not consumer mortgages — a distinction that governs which disclosures apply and lets us lend on investment property in all fifty states, not only the three where we originate owner-occupied financing.
A DSCR loan is business-purpose credit, not a consumer mortgage. That distinction is easy to miss and it matters here: the prepayment protections a borrower is used to from refinancing their own home are consumer-mortgage rules, and they do not carry over to an investment loan closed in an LLC. Assume a prepayment charge exists until you have read otherwise on the term sheet.
In California that lands harder than elsewhere, because the thesis is usually not cash flow. When a coastal property underwrites near 1.00 at purchase, the plan is generally to hold through appreciation and then refinance or sell — which is precisely the event a prepayment charge is designed to price. An investor who intends to refinance as soon as the rents support it can sign a penalty window that outlasts the plan and never notice until the payoff demand arrives.
So work backwards from the exit. Decide when you realistically expect to refinance or sell, then ask what the charge looks like in that year specifically — not in general terms. Many programs will trade a shorter window for different pricing, and on a California file that trade is usually worth pricing out rather than accepting whatever the default is.
The property address and either the executed lease or your rent expectation. The purchase price or your estimate of value on a refinance. An insurance quote if the property is in a fire-exposed area. The full tax bill including any special assessments. Your credit range and how much you plan to put down.
With those we can tell you the ratio your file will actually underwrite to — using the reset tax basis, not the seller's — and whether the deal clears as structured or needs one of the levers above.
Most programs want a ratio of 1.0–1.25 (rent covers the payment). Some allow sub-1.0 with a larger down payment. We'll quote your exact deal in minutes.
No. DSCR loans qualify on the property's cash flow, not your personal income or tax returns — which is why investors and self-employed buyers love them.
Yes — closing in an LLC is standard for DSCR and keeps the financing off your personal credit. We set it up correctly so it doesn't slow your close.
Almost certainly. Proposition 13 caps assessment growth while ownership stays the same, then resets to the purchase price on transfer. If you are buying from a long-time owner, expect a materially higher tax bill than the seller's — and expect it to be in your DSCR calculation.
Yes, when the ADU is legally permitted and there is a lease or a market-rent opinion supporting it. Unpermitted units generally cannot be counted and can affect the appraised value as well, so confirm the permitting before you rely on that income.
Often, yes. There are programs for ratios under 1.00 and some with no ratio requirement, typically at lower leverage with stronger reserves. A larger down payment, an interest-only structure or a rate buydown can also lift the ratio — which is cheapest depends on your hold period.
It affects the income side. Where a tenant is well below market, underwriting will generally use the actual lease rather than the appraiser's market rent, so a below-market in-place tenant lowers your qualifying ratio even though the property could rent for more.
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