DSCR Calculator
Use our DSCR Calculator to confirm your DSCR loan amount. Our DSCR loan calculator will help you screen rental property investment opportunities. Become an expert by understanding how things such as interest rate, rent, taxes, utilities, maintenance, property management and insurance affect DSCR.
DSCR Calculation
DSCR or Debt Service Coverage Ratio is a metric used by private lenders to assess the financial strength of a rental property and determine the maximum eligible loan amount or loan-to-value (LTV).
Below, you will learn how DSCR is calculated a few different ways that produce slightly different values. The simplest way to calculate DSCR is to divide Net Operating Income (NOI) by Principal and Interest (P&I).
Net Operating Income is Rent - Taxes - Insurance - Utilities - HOA - Property Management - Maintenance. A DSCR of 1 means the property generates just enough operating income to "service the debt" on the property. That means a DSCR of 1 is breakeven, $0 free cash flow. A DSCR greater than 1 means the rental property generates more than enough income to service its debt. A DSCR less than 1 means the property does not generate enough income to service its debt and therefore the owners need to pay out of pocket every month to cover the shortfall.
| DSCR | Meaning |
|---|---|
| Less than 1 | Owner needs to pay out of pocket to cover monthly expenses |
| 1 | Owner breaks even, property covers its expenses exactly |
| Greater than 1 | Owner receives excess cash, property more than covers expenses |
DSCR Loan Calculation
In order to properly understand the concept of debt service coverage ratio, it's helpful to use an example:
Jenny is in contract to buy a rental property for $200,000. The property appraises for $200,000 with a $2,000 market rent opinion from the appraiser. Jenny's learns about a type of loan -- called a "DSCR loan" -- where the maximum loan amount is based on the cash flow of the property and she doesn't need to have a W2 or provide tax returns. The lender is able to provide up to 80% LTV ($160,000), as long as the debt service coverage ratio is at least 1.1 at 80% LTV. Jenny uses the calculator above to plug in the numbers and realizes that the property has a DSCR of 1.37 at 80% LTV, far more than the minimum required to qualify for 80% LTV.
Using the DSCR calculator not only helped Jenny understand what loan amount she qualified for, it gave her the confidence that she's buying a good deal, and it helped he understand the interplay between DSCR inputs including rent, taxes, insurance, and interest rates and how that affects cash to close and cash on cash return. If the market rent were $1,500, Jenny would only qualify for 70% LTV because DSCR would be too low at higher LTVs.
DSCR Loan Calculator
Lenders will have a minimum DSCR in their loan program guidelines, and if the DSCR is equal to or greater than that minimum, the property will qualify for DSCR loans are business purpose loans that use the rental property as collateral, and are most commonly 30 year fixed rate mortgages. DSCR loan programs -- also known as non-QM or non qualifying mortgages -- do not look at the borrowers income or tax returns.
DSCR loans are originated based on three core underwriting components:
- Deal economics (DSCR) -- does the rental property generate cash flow?
- Borrower credit score -- does the borrower have a history of paying their debts?
- Borrower experience -- does the borrower have other investment properties and know what they're doing?
Borrower experience is less important because the borrower can always hire a property management company. Deal economics and credit score are deal breakers. Most rental property investors don't realize just how important their credit score, so read on on how credit score affects your loan amount and interest rate for DSCR loans. Hint: 720 is the magic number!
See DSCR Loan Interest Rate Index.
DSCR Calculation
Private lenders use two different formulas to calculate DSCR. It's important to understand each method in order to avoid max LTV surprises for your next DSCR loan.
Max LTV for DSCR Loans
Many private lenders have a maximum LTV of 75% for cash out refinance, and 80% for purchases.
DSCR for Vacant Rental Property
It is important to be aware that many lenders will utilize 90% of the appraised rent amount if your property is vacant at settlement. This will reduce your DSCR and may reduce the maximum LTV and loan amount.
DSCR Method 1: NOI ÷ Debt Service
NOI = Rent - Taxes - Insurance - Utilities - HOA - Property Management - Maintenance
Debt Service = Mortgage Principal + Mortgage Interest
Method 2: (Rent - Maintenance - Property Management - Utilities) ÷ PITIA
PITIA = Principal + Interest + Taxes + Insurance + Association Fees
Calculate DSCR
Use the DSCR Calculator above to calculate DSCR using Method 1 and Method 2.
