Do investors calculate the DSCR ratio using the interest-only payment, and how much does IO help a thin ratio?

When a loan has an interest-only feature, DSCR is typically calculated using the actual IO payment rather than a fully amortizing payment, since the qualifying payment is what the borrower is contractually obligated to pay during the IO period. This means using IO can meaningfully improve a thin DSCR — because the payment is lower, monthly gross rent divided by that payment produces a higher ratio than if principal were included. For an investor sitting right at a 1.00 or 1.10 threshold, structuring the loan as IO can be the difference between qualifying and not. That said, the exact treatment varies by investor. Some programs allow the IO payment for qualification across all DSCR tiers, while others may still stress the payment or require a minimum ratio calculated on the fully indexed/amortizing basis for pricing or risk-layering purposes, even if IO is permitted contractually. Verus, for example, outlines DSCR calculation methodology tied to the qualifying payment type in its Selling Guide (Verus, Selling Guide p.12), and other non-QM investors have their own overlays on minimum DSCR by property type, loan purpose, and IO eligibility. Borrowers and originators should always confirm with the specific investor whether IO qualification is permitted for a given DSCR tier, since this materially affects both approval and pricing.