The formula
DSCR stands for debt service coverage ratio. For rental property loans it is the monthly rent divided by the monthly housing payment. The housing payment is called PITIA, which covers principal, interest, property taxes, homeowners insurance, and any association dues.
If a property rents for $3,000 a month and the full payment is $2,500, the DSCR is 3,000 divided by 2,500, which equals 1.20. A ratio of 1.00 means the rent just covers the payment. Above 1.00 means there is cushion. Below 1.00 means the property loses money before any repairs or vacancy.
Which rent number counts
Lenders use the lower of the signed lease amount and the market rent estimated by the appraiser. If a tenant pays well under market, the lender will often use the lease. If the unit is vacant, the appraiser's rent estimate is used.
Short-term rentals work differently. Programs may use platform income reports or a third-party analysis in place of a lease.
Why the lender cares
A property that covers its own payment is less likely to go into default. The lender is underwriting the building, not the borrower's salary. That is why DSCR loans skip tax returns and pay stubs.
A quick worked example
Suppose you are buying a duplex for $360,000 with 25 percent down.
- Loan amount: $270,000
- Principal and interest at 7 percent over 30 years: about $1,796
- Property taxes: $310 a month
- Insurance: $140 a month
- PITIA total: about $2,246
- Combined rent from both units: $3,000
- DSCR: 3,000 divided by 2,246, which is about 1.34
What counts as a good ratio
Many programs accept 1.00 or higher. Some accept lower ratios with a bigger down payment. A ratio of 1.25 or above is comfortable and tends to bring better pricing. Treat 1.00 as the line and anything above it as safety margin.
This article is general information and not financial, tax, or legal advice. Loan terms vary by lender and change over time.