DSCR (Debt Service Coverage Ratio) is the foundation of DSCR loan underwriting. Understanding how it's calculated and what ratios qualify is essential for any investor pursuing DSCR financing.
The DSCR formula
DSCR = Gross Monthly Rent / Monthly PITIA. PITIA = Principal + Interest + Taxes + Insurance + Association dues. A DSCR of 1.0 means rent exactly covers debt service. 1.25 means rent is 25% above debt service.
Minimum DSCR by lender tier
Most institutional DSCR lenders require 1.0 minimum. Some accept 0.75-0.99 with rate adjustments and higher down payments. 1.25+ qualifies for best pricing. Some lenders use "DSCR no-ratio" — typically 60-70% LTV with no DSCR test.
How rent is determined
For occupied properties: lease in place. For vacant or future-rent properties: appraiser rent estimate (Form 1007 or equivalent). Some lenders accept Rentometer or other market data.
How PITIA is calculated
Principal and interest at the quoted rate. Taxes at the assessed value (or projected reassessment for transfer). Insurance at quoted policy. Association/HOA at current dues. All combined into a single monthly figure.
How the DSCR Ratio Works FAQ
1.0 — meaning rent equals debt service. Best pricing typically requires 1.25+.
Some lenders accept 0.75-0.99 with higher down payment (30%+) and rate premiums. Below 0.75 is rarely fundable.
Most lenders use the appraiser's rent estimate from Form 1007 or equivalent. Some lenders accept Rentometer or market comparable data.
Standard DSCR is gross rent / PITIA. It does not subtract vacancy, management, or maintenance. Some "true DSCR" calculations adjust for these, but most lenders use gross.
Yes — buying down the rate via points reduces P&I, improving DSCR. This is a common strategy for marginally-failing DSCR deals.
Debt yield is annual NOI / loan amount. DSCR is gross monthly rent / monthly PITIA. Different metrics; both used in real estate lending. DSCR is standard for residential investor DSCR loans.