What Is DSCR? How Lenders Measure a Property's Cash Flow
Learn how debt service coverage ratio is calculated, what lenders look for and how to improve yours before you apply.
By the CFUND advisory team · 5 min read
The formula
DSCR = Net Operating Income ÷ Annual Debt Service.
Example: a rental brings in $60,000 a year after operating expenses. Its loan payments total $48,000 a year. $60,000 ÷ $48,000 = 1.25 DSCR.
For one-to-four unit rental (DSCR) loans, lenders often simplify this to monthly rent divided by the monthly payment including taxes, insurance and HOA dues.
What lenders want to see
- Below 1.0 — the property doesn't cover its payment. Possible with some lenders, but expect tradeoffs
- 1.0 to 1.2 — breakeven to thin cushion. Qualifies with many rental programs
- 1.25 and up — the common target for better pricing and higher leverage
How to improve your DSCR
- Put more money down to reduce the loan payment
- Choose a longer amortization or an interest-only period
- Raise rents to market or reduce operating expenses
- Shop insurance and appeal property taxes
- Buy down the rate