How to Calculate a DSCR Loan

Today we are going to discuss how to calculate a DSCR loan. First we need to answer the question, “what is a DSCR loan?” A DSCR (Debt Service Coverage Ratio) loan helps real estate investors qualify based on rental income, not personal income. But how do you calculate it? Let’s break it down step by step.

What Is DSCR?

DSCR stands for Debt Service Coverage Ratio. Lenders use it to see if a property makes enough rental income to cover the mortgage. A DSCR of 1.0 means the rental income equals the loan payment. A higher DSCR means more cash flow.

DSCR Formula

The formula is simple:

DSCR=1,500/1,200 or 1.25

Now, let’s go step by step.

First: Find Your Gross Rental Income

This is the monthly rent collected from the property. If the rent is $1,500 per month, that’s your starting number.

Second: Calculate Your Total Monthly Debt Payments

This includes:

• Principal and interest on the loan
• Property taxes
• Homeowners insurance
• HOA fees (if applicable)

For example, let’s say your loan payment (including taxes and insurance) is $1,200 per month.

Third: Plug the Numbers Into the Formula

Using our example:

DSCR=1,500/1,200 or 1.25

What Does Your DSCR Mean?

• 1.25 or higher – Your property cash flows well. Most lenders approve DSCR loans above this number.
• 1.0 to 1.24 – The property covers the loan but has little extra cash flow. Some lenders may approve, but rates might be higher.
• Below 1.0 – The property does not make enough to cover the mortgage. A lender will likely decline the loan.

Why DSCR Matters

A higher DSCR means:
First, Easier loan approval
Second, Better loan terms
Finally, More cash flow for you

Ready to Calculate Your DSCR Loan?

Use this formula to check if your rental property qualifies for a DSCR loan. The higher your DSCR, the better your loan options. Want help? Contact us today to find out more!

Now, go run your numbers and see if your property qualifies!