1st Advantage MortgageTo calculate DSCR, divide the property's monthly rent by its full monthly PITIA (principal, interest, taxes, insurance and association dues). Rent of $2,400 over PITIA of $2,000 gives a DSCR of 1.20. Many programs commonly want 1.0 or higher, and each lender sets its own minimum.
Step 1: Get the monthly rent
Use the signed lease for a tenanted property, or a realistic market rent for a vacant one. Lenders verify it with the lease or the appraiser's rent schedule, so an optimistic number only delays the answer. For a 2 to 4 unit property, add the rent for all units.
Step 2: Build the monthly payment (PITIA)
- Principal and interest. Based on the loan amount, rate and term. Use the DSCR calculator to compute it.
- Property taxes. The annual tax estimate divided by 12. Use the post-purchase figure for the county, not the seller's bill.
- Insurance. The annual premium divided by 12. Include flood insurance where it is required.
- Association dues. Monthly HOA or condo dues, if any.
Step 3: Divide
DSCR equals monthly rent divided by PITIA.
Common mistakes
- Leaving out taxes or insurance. Leaving them out makes the ratio look better than the lender will calculate.
- Using the seller's tax bill. A sale can change the assessment, especially in South Carolina, where investment property is generally assessed higher.
- Forgetting flood insurance. It counts in PITIA when it is required.
- Using projected rent that the appraiser will not support. The appraisal's market rent is often what counts on a vacant property.
- Counting property management. Most DSCR formulas do not subtract management or maintenance, so keep those in your own budget.
What ratio do lenders want?
Many programs commonly accept 1.0 or higher. Some accept lower, with larger down payments, more reserves or higher pricing. Pricing generally improves as the ratio rises. See the full how DSCR loans work guide and the requirements.
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Keep reading
- How to Improve a Low DSCR: 8 Practical Levers for Rental Investors
- DSCR Loan Documents Checklist for North Carolina and South Carolina Investors
- Buying a Rental Property in an LLC With a DSCR Loan in NC and SC
- DSCR Cash-Out Refinance in NC and SC: How Investors Pull Equity for the Next Deal
- DSCR Loan Closing Costs and 10 Questions to Ask Before You Lock
General information for investors, not legal, tax or lending advice. Programs and guidelines vary by lender and change. This is not a commitment to lend.
Frequently asked questions
What is a good DSCR for a rental property?
Many lenders commonly want 1.0 or higher, and a higher ratio such as 1.25 generally gets better pricing. Each lender sets its own minimum.
Is DSCR based on gross rent?
On most DSCR loans, the numerator is the gross monthly rent from the lease or the appraiser's rent schedule, and the denominator is PITIA. Operating expenses such as management and repairs are usually not subtracted.
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