DSCR explained
What DSCR is, and how a lender uses it on a rental
One question decides a DSCR loan: does the rent cover the full monthly payment? Here is how the number works, with one house worked through.
DSCR stands for debt service coverage ratio. For a rental, it is the monthly rent divided by the full monthly payment on the loan.
A DSCR loan qualifies mostly on the property's rent instead of your personal income. On a conventional mortgage the lender checks your pay stubs and debts; a DSCR lender checks whether the rent covers the payment.
DSCR = monthly rent ÷ full monthly payment.
The full monthly payment is principal and interest, plus property taxes, insurance and any HOA dues. Lenders call it PITIA (principal, interest, taxes, insurance and association dues). Taxes and insurance count once, inside the payment; they are not also taken off the rent.
A $150,000 house, 25% down ($112,500 loan) at 7% for 30 years: principal and interest $748, taxes $250, insurance $120. The full monthly payment is $1,118.
- At $1,450 rent: $1,450 ÷ $1,118 = 1.30x. Clears the 1.20x cushion we use.
- At $1,300 rent: 1.16x. Covers the payment, so many lenders accept it, but it misses 1.20x.
- At $1,050 rent: 0.94x. The rent does not cover the payment; most lenders will not make this loan.
At 1.00x the rent exactly covers the full payment. Many DSCR lenders accept that as their minimum, often at a higher rate or with a smaller loan.
At 1.20x the rent is 20% more than the payment. That is the cushion we use on this site, because a rent that comes in lower than you planned, or a tax bill that goes up, can push a 1.05x deal under 1.00x.
A few lenders make loans below 1.00x, usually with a bigger down payment and a higher rate.
A lender uses the lease, or the appraiser's estimate of market rent for the house (a rent schedule the appraiser fills in, often called Form 1007), and often the lower of the two. Plan on a rent that similar houses nearby actually get.
Only two things move it: the rent, and the full payment.
- More rent: the $1,118 payment above needs at least $1,342 of rent to reach 1.20x.
- A smaller payment: at $1,300 rent, putting 35% down instead of 25% lowers the payment to $1,019 and lifts the ratio from 1.16x to 1.28x.
- A lower price or a lower rate shrinks principal and interest; lower taxes, insurance or HOA dues shrink the rest.
The lender's ratio leaves out vacancy, repairs and management, but you pay them. Our market pages set aside 25% of rent for them (5% vacancy, 10% repairs, 10% management).
The $1,450 house above clears 1.20x, yet after the $1,118 payment and a 25% set-aside ($363) it leaves about -$31 a month. Check both numbers.
A good ratio is not an approval. A lender also looks at your credit score, your down payment, the appraisal, the property type and reserves (the cash you still have after closing, usually a few months of payments).
DSCR loans are business-purpose loans for rental property, not for a home you live in.
Try it on a house you are looking at
The calculator shows the ratio, the full payment behind it, what gets it to 1.20x, and your cash flow.
You'll continue to the loan application at Sphinx Capital, the DSCR lender we refer investors to. The rent, payment and ratio from this page go with you.