The Debt Service Coverage Ratio (DSCR) measures whether an investment property generates sufficient rental income to cover its mortgage payment.
For brokers originating non-QM loans, understanding DSCR calculations is essential for qualifying investor clients and setting accurate expectations before submission.
This tutorial breaks down the DSCR calculation process step by step, covering income documentation sources, expense components, ratio interpretation, and strategies for optimizing borderline scenarios.
The DSCR Formula Explained
At its core, the DSCR formula is simple division:
DSCR = Gross Monthly Rental Income ÷ Total Monthly PITIA
Where:
- Numerator (Top):The property’s gross monthly rental income
- Denominator (Bottom):Total monthly housing payment including Principal, Interest, Taxes, Insurance, and Association dues
A DSCR of 1.00 indicates break-even—the rental income exactly covers the housing payment. Ratios above 1.00 show positive cash flow, while ratios below 1.00 indicate the property operates at a monthly loss.
What the Ratio Numbers Mean
Understanding ratio interpretation helps brokers quickly assess scenarios:
| DSCR Range | Cash Flow Status | Typical Program Availability |
|---|---|---|
| 1.25+ | Strong positive cash flow | Best pricing, highest LTV |
| 1.10 – 1.24 | Moderate positive cash flow | Standard programs, competitive terms |
| 1.00 – 1.09 | Slight positive cash flow | Standard programs, some restrictions |
| 0.75 – 0.99 | Negative cash flow (deficit) | No-ratio programs, higher credit/lower LTV required |
| Below 0.75 | Significant deficit | Limited availability |
Step 1: Determine Gross Monthly Rental Income
The numerator in the DSCR calculation comes from one of several sources, depending on the transaction type and property status.
For Purchase Transactions
Occupied Property with Existing Lease:
Use the lesser of:
- Current lease amount shown on the executed lease agreement
- Market rent indicated on the appraisal’s rent schedule (Form 1007 or 1025)
Example: A property has a current lease for $2,200/month, but the appraiser determines market rent is $2,400/month. The qualifying income is $2,200 (the lesser amount).
Vacant Property:
Use the appraiser’s market rent estimate from Form 1007 (single-family) or Form 1025 (2-4 units). The appraiser analyzes comparable rental properties to establish market rent.
For Refinance Transactions
Rate-and-Term Refinance:
Typically use the current lease amount, verified with a copy of the executed lease agreement showing the tenant name, monthly rent, and lease term.
Cash-Out Refinance:
Most programs use the current lease amount, though some require verification that the lease rate aligns with market rents. If significantly above market, the appraiser’s estimate may apply.
Multi-Unit Property Income
For 2-4 unit properties, aggregate the rental income from all units:
Example: Triplex Income Calculation
- Unit 1: $1,400/month
- Unit 2: $1,350/month
- Unit 3: $1,250/month
- Total Gross Monthly Rent: $4,000
If one unit is owner-occupied (not applicable for DSCR loans since they’re investment-only), that unit’s potential rent would be excluded. For fully rented properties, all units contribute to the total.
Short-Term Rental Income
Properties operated as Airbnb or vacation rentals have specialized income documentation:
Option 1: Operating History
Use actual rental income documented through 12-24 months of operating statements, booking platform reports, or tax returns showing rental income.
Option 2: Third-Party Projections
Services like AirDNA, Rabbu, or similar platforms provide projected income based on comparable short-term rentals. Some lenders accept these projections with additional requirements (higher DSCR thresholds, credit score minimums).
Option 3: Long-Term Market Rent
Use the appraiser’s market rent estimate as if the property were a traditional long-term rental—the most conservative approach.
Step 2: Calculate Total Monthly PITIA
The denominator captures all monthly housing expenses the property must support. Each component must be accurately calculated.
Principal and Interest (P&I)
Calculate the monthly loan payment based on:
- Loan Amount:The actual amount being financed
- Interest Rate:The note rate (not a temporary buydown rate)
- Loan Term:Typically 30 years for standard DSCR loans
Important Notes:
- For interest-only loans, use only the interest portion during the I/O period
- For ARMs, use the fully-indexed rate or note rate depending on program guidelines
- For buydown products, use the note rate, not the bought-down rate
P&I Calculation Example:
- Loan Amount: $320,000
- Interest Rate: 7.50%
- Term: 30 years
- Monthly P&I: $2,237.49
Property Taxes
Convert annual property taxes to monthly:
Monthly Taxes = Annual Property Tax ÷ 12
Use the most current information available:
- Most recent property tax bill
- County assessor records
- For new construction, use the estimated assessed value × local tax rate
Example:
- Annual Property Tax: $4,800
- Monthly Taxes: $400
Hazard Insurance
Convert annual insurance premiums to monthly:
Monthly Insurance = Annual Premium ÷ 12
Include all required coverage:
- Primary hazard/homeowner’s insurance
- Flood insurance (if in flood zone)
- Windstorm/hurricane insurance (if required in coastal areas)
- Any additional coverage required by the lender
Example:
- Annual Hazard Insurance: $1,800
- Annual Flood Insurance: $600
- Monthly Insurance: ($1,800 + $600) ÷ 12 = $200
Association Dues
Include monthly HOA, condo association, or PUD fees if applicable:
- Use the current monthly assessment
- Include any special assessments expected to continue
- For newly constructed communities, verify fees are established
Example:
- Monthly HOA: $150
- Monthly Association Dues: $150
Calculating Total PITIA
Sum all components for the complete monthly obligation:
PITIA = P&I + Taxes + Insurance + Association Dues
Full Example:
- P&I: $2,237.49
- Taxes: $400
- Insurance: $200
- HOA: $150
- Total PITIA: $2,987.49
Step 3: Perform the DSCR Calculation
With both numbers determined, divide income by expenses:
DSCR = Gross Monthly Rent ÷ Total PITIA
Worked Example: Single-Family Rental
Property Details:
- Purchase Price: $400,000
- Loan Amount: $320,000 (80% LTV)
- Interest Rate: 7.50%
- Monthly Rent: $3,200
PITIA Calculation:
- P&I: $2,237.49
- Property Taxes: $375/month
- Insurance: $175/month
- HOA: $0
- Total PITIA: $2,787.49
DSCR Calculation:
- DSCR = $3,200 ÷ $2,787.49
- DSCR = 1.148
Interpretation: This property has a DSCR of 1.15 (rounded), indicating 15% positive cash flow above the mortgage payment. This qualifies for standard DSCR programs.
Worked Example: Duplex
Property Details:
- Purchase Price: $525,000
- Loan Amount: $420,000 (80% LTV)
- Interest Rate: 7.625%
- Unit 1 Rent: $1,800
- Unit 2 Rent: $1,650
- Total Monthly Rent: $3,450
PITIA Calculation:
- P&I: $3,004.76
- Property Taxes: $475/month
- Insurance: $225/month
- HOA: $0
- Total PITIA: $3,704.76
DSCR Calculation:
- DSCR = $3,450 ÷ $3,704.76
- DSCR = 0.931
Interpretation: This property has a DSCR of 0.93, indicating a monthly deficit. This qualifies for no-ratio DSCR programs (typically requiring 700+ credit score and lower LTV).
Step 4: Optimize the DSCR Ratio
When a scenario falls short of program thresholds, several strategies can improve the ratio.
Strategies to Increase DSCR
- Reduce Loan Amount (Increase Down Payment)
A larger down payment reduces the P&I component:
- Original: $320,000 loan at 7.50% = $2,237 P&I
- Increased down payment: $300,000 loan = $2,097 P&I
- P&I reduction: $140/month
- Buy Down the Interest Rate
Permanent note rate buy downs trade up front closing costs for lower interest rates, which could significantly impact monthly P&I.
- Select Interest-Only Payment
Interest-only loans reduce monthly payments by eliminating principal:
- 30-year amortizing at $320,000, 7.50%: $2,237/month
- Interest-only at same terms: $2,000/month
- Payment reduction: $237/month
- Verify Rent Supports Market
If the appraiser’s market rent is higher than an existing below-market lease:
- Consider whether the tenant would renew at market rate
- Some programs allow market rent when the lease is expiring within 90 days
- For vacant properties, aggressive comparable selection can maximize market rent
- Shop Insurance
Insurance premiums vary significantly:
- Obtain multiple quotes before locking
- Consider higher deductibles (if permitted)
- Bundle policies for discounts
Impact Analysis Table
This table shows how DSCR changes with loan amount adjustments:
| Loan Amount | P&I @ 7.50% | Total PITIA* | Rent $3,200 | DSCR |
|---|---|---|---|---|
| $340,000 | $2,377 | $2,927 | $3,200 | 1.09 |
| $320,000 | $2,237 | $2,787 | $3,200 | 1.15 |
| $300,000 | $2,097 | $2,647 | $3,200 | 1.21 |
| $280,000 | $1,957 | $2,507 | $3,200 | 1.28 |
*Assumes $550/month taxes + insurance
Common DSCR Calculation Mistakes
Avoid these frequent errors that lead to inaccurate submissions:
Mistake 1: Using Temporary Buydown Rates
Wrong: Using a 2-1 buydown rate of 5.50% in year one
Correct: Using the underlying note rate of 7.50%
DSCR is calculated at the note rate to ensure the property can support the full payment when buydown periods expire.
Mistake 2: Forgetting Flood or Windstorm Insurance
Wrong: Including only hazard insurance at $1,800/year
Correct: Including hazard ($1,800) + flood ($900) + windstorm ($600) = $3,300/year
Properties in flood zones or coastal areas carry mandatory additional coverage that significantly impacts PITIA.
Mistake 3: Using Gross Rent for Multi-Unit When One Is Vacant
Wrong: Using projected rent for all three units of a triplex when one is vacant
Correct: Using actual leases for occupied units plus market rent only for vacant unit(s)
Verify how the specific lender handles partial vacancy in multi-unit properties.
Mistake 4: Excluding HOA Special Assessments
Wrong: Using only the base HOA fee of $200/month
Correct: Including the base fee plus any ongoing special assessment ($200 + $75 = $275)
Special assessments that extend beyond 12 months typically must be included.
Mistake 5: Misquoting Net vs. Gross Rent
Wrong: Quoting rent after tenant-paid utilities as $2,100
Correct: Quoting gross scheduled rent of $2,300 (DSCR uses gross rent)
DSCR calculations use gross rent—expenses like utilities, property management, maintenance, and vacancy are not deducted.
DSCR Thresholds by Program Type
Different DSCR levels unlock different loan program options:
DSCR 1.25 and Above
- Maximum LTV options (up to 80-85%)
- Best available pricing
- All property types eligible
- Interest-only available
- Lower reserve requirements
DSCR 1.00 – 1.24
- Standard LTV options (typically 75-80%)
- Competitive pricing
- Most property types eligible
- Interest-only with restrictions
- Standard reserve requirements
DSCR 0.75 – 0.99 (No-Ratio)
- Lower LTV required (typically 70-75%)
- Pricing adjustments apply
- Higher credit score required (usually 700+)
- Limited to certain property types
- Increased reserve requirements
No DSCR Calculation Required
Some programs waive DSCR calculation entirely for:
- High-credit borrowers (740+)
- Low LTV (65% or below)
- Strong liquidity (12+ months reserves)
Contact your Account Executive to discuss specific program parameters.
Quick Reference: DSCR Calculation Checklist
Use this checklist when calculating DSCR for loan submissions:
Income Verification:
- [ ] Current lease agreement obtained (if occupied)
- [ ] Appraisal with rent schedule ordered (Form 1007 or 1025)
- [ ] Market rent vs. lease rent compared (use lesser)
- [ ] All units accounted for (multi-unit properties)
- [ ] STR documentation gathered (if applicable)
PITIA Components:
- [ ] Loan amount and rate confirmed
- [ ] P&I calculated at note rate (not buydown)
- [ ] Property taxes verified (current tax bill)
- [ ] Hazard insurance quoted
- [ ] Flood insurance included (if applicable)
- [ ] Windstorm/hurricane insurance included (if applicable)
- [ ] HOA/condo fees confirmed
- [ ] Special assessments included
Calculation:
- [ ] Total PITIA computed
- [ ] DSCR calculated (Rent ÷ PITIA)
- [ ] Program threshold confirmed
- [ ] Optimization strategies considered (if needed)
Frequently Asked Questions
What rent amount is used for newly purchased vacant properties?
The appraiser’s market rent estimate from Form 1007 (single-family) or Form 1025 (2-4 units) serves as the qualifying income. The appraiser analyzes comparable rentals to determine fair market rent.
Can DSCR be calculated with interest-only payments?
Yes. For interest-only loans, the P&I portion of PITIA reflects only the interest payment during the interest-only period, which improves the DSCR ratio compared to fully amortizing payments.
How do lenders verify rental income?
Verification methods include: executed lease agreements, bank statements showing rent deposits, tax returns with Schedule E, or property management statements. For new purchases, the signed lease or appraiser’s market rent is used.
What if my calculation differs from the lender’s?
Common causes include: different insurance premium amounts, tax proration methods, note rate vs. buydown rate usage, or rounding differences. Always confirm the specific components used in the lender’s calculation.
Are there DSCR requirements for refinances vs. purchases?
Programs generally apply the same DSCR thresholds regardless of transaction type, though cash-out refinances may have modestly lower maximum LTV at certain DSCR levels.
Run Your DSCR Calculations
American Heritage Lending’s DSCR Calculator lets you instantly model scenarios with real-time results:
For complex scenarios or questions about specific program parameters, contact your Account Executive or reach our TPO team at (855) 340-9892.
Not yet a partner? Apply at ahlendtpo.com to access our full suite of DSCR and non-QM programs.