What is DSCR?
DSCR stands for debt service coverage ratio. In a DSCR loan for a rental property, the lender mainly looks at whether the property's rent covers the loan payment, instead of looking only at your personal income.
DSCR = monthly rent ÷ monthly payment (principal + interest + taxes + insurance + HOA)
A DSCR of 1.00 means the rent equals the payment. Above 1.00, the rent is higher than the payment. Below 1.00, the rent is lower.
Example
Rent of $3,200 a month. Loan of $420,000 at 7.25% for 30 years has a principal and interest payment of about $2,865. Add $600 a month for taxes ($7,200 a year) and $150 a month for insurance ($1,800 a year), and the total payment is about $3,615.
$3,200 ÷ $3,615 = 0.89
This example is below 1.00. Lowering the loan amount, raising the rent, or choosing an interest-only payment would raise the ratio. Try it in the calculator above.
What DSCR do lenders want?
| DSCR | What it usually means |
|---|---|
| 1.25 or higher | Rent comfortably covers the payment. Many lenders look favorably on this. |
| 1.00 to 1.25 | Rent covers the payment with little room. Some lenders accept it, sometimes with different terms. |
| Below 1.00 | Rent is lower than the payment. Some lenders have special programs; many do not. |
These ranges are general. Each lender sets its own minimum, rate and down payment. Ask lenders directly.