How do you calculate DSCR on a rental property?
The short answer
DSCR, the debt service coverage ratio, is the property's monthly rent divided by its full monthly payment: principal, interest, property taxes, insurance, and any HOA dues. A ratio of 1.0 means the rent covers the payment exactly, and most programs want 1.0 or higher. The Mortgage Advisory runs the ratio with real rent and real insurance quotes before you make an offer.
What's the formula?
DSCR = monthly rent ÷ monthly payment (PITIA)
PITIA means Principal, Interest, Taxes, Insurance, and Association (HOA) dues.
Can you show me an example?
| Property A | Property B | |
|---|---|---|
| Monthly rent | $3,000 | $2,400 |
| Principal & interest | $2,050 | $2,000 |
| Taxes | $350 | $400 |
| Insurance | $150 | $200 |
| HOA | $0 | $150 |
| Total payment | $2,550 | $2,750 |
| DSCR | 1.18 | 0.87 |
Property A pays for itself with room to spare. Property B falls short; it may still work on a program that allows a ratio under 1.0, usually with a bigger down payment.
Where does the rent number come from?
- On a purchase: usually the appraiser's market rent estimate, or the existing lease if it's already rented
- On a refinance: the current lease, sometimes with proof the rent is being paid
- Short-term rentals: past booking history or a short-term rental market report, depending on the program
How can I improve the ratio?
- Put more down to shrink the payment
- Shop the insurance; it's often the easiest number to move
- Buy down the rate with points
- Choose an interest-only option, if the program offers one, to lower the early payment
Our take
Investors get surprised by insurance and property taxes more than anything else. Before you make an offer, get a real insurance quote and check the tax rate; I'll plug both into the ratio so there are no surprises in underwriting.
Ace Ausar, Mortgage Banker · NMLS #1143018
The Mortgage Advisory, Inc. · NMLS #1549739
Reviewed by Ace Ausar, NMLS #1143018 · Updated
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