DSCR loans
How to Calculate DSCR (With Worked Examples)
Calculating DSCR takes two numbers and one common mistake to avoid. Here is the formula, worked in real dollars.
Want the dollar figure? See how much rent you need to qualify.
The formula
The formal Debt Service Coverage Ratio is net operating income divided by annual debt service. For one-to-four-unit rentals, most lenders use the simpler monthly version:
DSCR = Monthly Rent / Monthly PITIA
PITIA is the full payment: Principal, Interest, Taxes, Insurance, and any Association dues. The mistake that throws most investors off is using principal and interest alone and forgetting the taxes and insurance, which can add hundreds of dollars a month and drop your ratio into a different pricing tier.
A worked example
Take a rental that brings in 2,000 dollars a month. The loan would carry 1,400 in principal and interest. Annual taxes are 3,000 dollars, so 250 a month. Insurance is 1,200 a year, so 100 a month. There is no association fee. PITIA is 1,400 plus 250 plus 100, which is 1,750. So the DSCR is 2,000 divided by 1,750, about 1.14.
On principal and interest alone, 2,000 over 1,400 looked like a comfortable 1.43. Add the taxes and insurance the lender always includes, and the real number is 1.14. Same property, two different conclusions, and the lender uses 1.14.
Which rent counts
Lenders often use the lower of the lease in place and an appraiser's market-rent estimate. If your leases are below market, expect the lower number. For a short-term rental, expect the lender to want documented history or a market study before counting that income.
Reading your result
- 1.25 and above: strong, the best pricing tier.
- 1.00 to 1.24: workable and widely financeable.
- Below 1.00: a shortfall, fewer lenders, higher cost.
Run your own property in seconds on the DSCR calculator, then see current pricing ranges in the Rate and Terms Survey. For the full picture, read what a DSCR loan is.