The DSCR formula
DSCR = Net operating income ÷ Debt service
A DSCR of 1.00 means the property's income exactly covers the loan payment. Above 1.00 there's a cushion; below it, you're paying the difference out of pocket.
Example
A home rents for $2,400. After 5% vacancy and $600 of operating expenses, monthly NOI is $1,680. With a $1,450 loan payment, the DSCR is 1.16: positive, but below the 1.25 many lenders prefer.
What DSCR do lenders require?
Requirements vary by lender. 1.20–1.25 is common for the best terms, some programs go down to 1.00, and a few will lend below 1.00 at a higher rate. Note that some DSCR lenders calculate the ratio on gross rent versus PITIA instead of NOI, so ask how your lender does it.
Common questions
What is a DSCR loan?
A loan for investment property that qualifies you based on the property's rental income instead of your personal income or tax returns.
How do I raise my DSCR?
A larger down payment, a lower rate, higher rent or lower expenses all improve it.