DSCR (Debt Service Coverage Ratio) for Rental Property

The formula

DSCR = Net operating income / Annual debt service

Net operating income is the rent minus operating costs, before the mortgage. Debt service is the total of a year's loan payments. A DSCR of 1.0 means the property earns exactly enough to cover the loan. Above 1.0 there's a cushion, and below 1.0 the property doesn't cover its payment.

Many DSCR lenders work from rent divided by the full monthly payment (principal, interest, tax and insurance) instead. It's a slightly different calculation, so ask which one a lender uses.

An example

A property has US$18,000 of NOI, and the loan payments add up to US$15,000 a year. DSCR is 18,000 / 15,000, which is 1.2.

If rent drops 10%, NOI falls by more than 10% because the costs don't shrink. The cushion tells you how much room you have before the loan is underwater.

What lenders want

Most DSCR lenders look for at least 1.0 to 1.25. A higher ratio usually earns better terms. A ratio under 1.0 sometimes gets approved with a bigger down payment and a higher rate.

DSCR vs a DSCR loan

DSCR is the ratio. A DSCR loan is a mortgage approved mostly on that ratio, instead of your personal income. Investors use them when conventional lenders cap the number of mortgages they'll count, or when they have income that's hard to document. Non-US residents use them as foreign national loans.

Ways to raise it

• Put more money down, which lowers the payment.
• Choose an interest-only period, if the lender offers one.
• Raise the rent, if the market allows it.
• Pick a property with lower taxes or insurance.

Related reading

The DSCR loans guide shows the interest-only example. If you're buying from Canada, see whether a Canadian can get a DSCR loan. The calculator shows the DSCR for any price and rent.