DSCR Calculator

DSCR Loan Calculator


DSCR Loan Calculation

How Do I Calculate DSCR?

DSCR (Debt Service Coverage Ratio) calculates the ratio between the investment property’s net operating income (NOI) and its total debt service. This includes all debt obligations such as principal and interest payments, property taxes, insurance premiums and HOA fees.

DSCR Formula

Net Operating Income

Net Operating Income (NOI) is calculated by multiplying the monthly rental income by 12 to account for a full year. This excludes any expenses such as monthly interest, taxes, depreciation, and amortization. It represents the amount of cash flow available to meet its debt.

Total Debt Service

Total Debt Service is calculated by adding 12 principal and interest payments, annual property taxes, annual insurance premiums, and the total sum of any HOA fees that may be incurred.

How Lenders use a DSCR Calculator

Lenders use a DSCR calculator to assess an investment property’s ability to generate enough rental income to cover its monthly debt obligations. This allows lenders to evaluate the financial health and risk level of the investment property.

DSCR: 1+

A DSCR ratio more than 1 implies the investment property earns enough income to exceed its debt payments. This translates to lower risk for the lender and indicates the property’s financial health is strong, which leading to favorable loan terms.

DSCR: 0-1

A DSCR ratio below 1 means that the investment property’s income does not cover its debt payments. Implying higher risks for the lender. To proceed with the DSCR loan, lenders will ask investors to increase DSCR. They may also choose to increase interest rates or reject the loan.

How to Improve a Low DSCR

  1. Increase your down payment or pay down principal to lower monthly mortgage payments.
  2. Find lower quotes for your landlord insurance policy.
  3. Request a new 1007 appraisal if monthly rental rates came back lower.
  4. Switch an interest only loan rather than a principal and interest loan type.

What DSCR Do I Need to Qualify for a Loan?

To qualify for a DSCR loan for a rental property, you’ll need a DSCR of 1.1 or more to get approved. Higher ratios give you a cushion in case your appraisal comes back lower (Form 1004).

DSCR Meaning
0-1 The investment property cannot sufficiently meet its annual debt obligations, such as principal, interest payments, property taxes, landlord property insurance, and any HOA fees.
1 Investment property covers its expenses without any cushion or margin of safety.
1+ The property generates additional cash flow after paying all of its annual debt obligations. This surplus can be used to buy another rental property, pay down principal, distribute to property owners, or save for future uncertainties.