DSCR Formula: How to Calculate DSCR (Examples)
When diving into real estate investment, understanding how lenders evaluate potential properties is crucial. One key metric that plays a significant role in this evaluation process is the Debt Service Coverage Ratio (DSCR). This guide will break down the DSCR formula, providing the knowledge you need to ensure your future investments qualify before committing time and resources to inspections and appraisals.
What is the DSCR Formula?
For 1–4 unit rentals, the DSCR formula is: DSCR = monthly rent ÷ monthly PITIA (principal, interest, taxes, insurance and HOA dues). A DSCR of 1.0 means the rent exactly covers the payment; above 1.0 means the property cash flows.
The Commercial DSCR Formula (5+ Units)
For apartment buildings and other commercial properties, lenders use annual numbers: DSCR = net operating income (NOI) ÷ annual debt service. NOI is gross rent minus vacancy and operating expenses such as taxes, insurance, repairs and management, but not the mortgage. See DSCR loans for 5–9 unit properties.
Breaking Down P.I.T.I.A.
P.I.T.I.A. encompasses all key payments associated with holding a property:
Principal and Interest: These are the main components of your mortgage payment.
Taxes: Property taxes based on the value of the property.
Insurance: Homeowners insurance premiums protecting the property.
Association Dues: Applicable for properties within community associations.
If a property does not have association dues, simply omit that component from the calculation.
DSCR Calculation Examples
Monthly rent | Monthly PITIA | DSCR | What it means |
|---|---|---|---|
$2,500 | $1,850 | 1.35 | Strong; best pricing with most lenders |
$1,750 | $1,650 | 1.06 | Qualifies with most lenders |
$2,000 | $2,100 | 0.95 | Needs a sub-1.0 or interest-only program |
To calculate it, add up the full monthly payment, then divide the rent by it. Example 2: $1,750 ÷ $1,650 = 1.06.
Interest-Only DSCR Loans
For properties with a DSCR slightly below one, some lenders offer interest-only DSCR loans, where the principal isn't factored into the ratio. This option might be suitable under certain circumstances.
Example: on a $300,000 loan at 7.5%, the 30-year principal-and-interest payment is about $2,098, while the interest-only payment is $1,875. That $223 difference can lift a 0.95 DSCR above 1.0.
Minimum DSCR Requirements Vary by Lender
Each lender may have different DSCR requirements. Some accept a "no ratio" approach, where rental income isn't a factor, typically demanding a larger down payment or a lower loan-to-value ratio on refinancing due to increased risk. Others might have a minimum ratio between 0.75 and 0.99, but the most favorable loan rates generally require a ratio of at least 1:1.
DSCR Calculator
Want to run other scenarios? Browse all of our DSCR and real estate investor calculators, including the max DSCR loan amount, DSCR refinance and BRRRR calculators.
Plug your rent, taxes, insurance and loan amount into the calculator above to see your ratio in seconds. Not sure what number to aim for? Read What is a good DSCR ratio? or get your free DSCR loan options.
DSCR Formula: Frequently Asked Questions
Which rent does the lender use? Usually the lower of your lease or the appraiser's market rent from the rent schedule. See DSCR appraisals and the rent schedule.
Does the DSCR formula include vacancy or repairs? Not for 1–4 unit DSCR loans; only PITIA is counted. Commercial loans use NOI, which does.
What DSCR do I need to qualify? Most lenders want 1.0 or higher; see DSCR loan requirements.
