What Is Debt Service Coverage Ratio?

DSCR is the number your lender cares about most. It answers a simple question: does this property make enough money to pay the mortgage? If the answer is no, you are not getting the loan. If the answer is barely, you are getting the loan with bad terms.

Understanding DSCR is essential whether you are buying your first rental property or your twentieth.

How to Calculate DSCR

DSCR = Net Operating Income ÷ Annual Debt Service

Net Operating Income is gross income minus operating expenses (not including mortgage payments). Annual debt service is your total mortgage payment for the year (principal + interest).

Example: Property NOI is $52,000/year. Annual mortgage payment is $40,000.

DSCR = $52,000 ÷ $40,000 = 1.30

The property earns 30% more than the mortgage requires. That is a comfortable margin and would satisfy most lenders.

What Lenders Want to See

• Below 1.0: Property loses money. No conventional lender will touch this.
• 1.0-1.15: Barely covers the mortgage. Very risky. Some DSCR-specific lenders will approve at 1.0 but with higher rates (8-10%).
• 1.15-1.25: Adequate. Most lenders want at least 1.2-1.25.
• 1.25-1.50: Strong. Good terms, easier approval.
• Above 1.50: Excellent. The property comfortably covers debt with significant margin.

The higher your DSCR, the better your loan terms. A property with 1.5 DSCR will get a lower interest rate than one at 1.2 because the lender has more cushion if income dips.

DSCR Loans vs. Conventional Loans

Traditional investment property loans underwrite based on your personal income and tax returns. DSCR loans underwrite based on the property's income. This is a game changer for investors who have high write-offs or multiple properties that make their tax returns look weak.

With a DSCR loan, the lender does not care about your W-2 or personal DTI. They care about the property's rent roll, the effective gross income, and the resulting DSCR. If the property cash flows well enough, you get the loan.

The trade-off: DSCR loans typically have interest rates 0.5-2% higher than conventional loans and may require 20-25% down.

Real Example: Will This Property Qualify?

You want to buy a 6-unit building for $450,000. You are putting 25% down and financing $337,500 at 7% for 30 years.

Monthly mortgage payment: $2,245
Annual debt service: $26,940

Property income: 6 units × $1,050/month = $75,600/year
Less vacancy (5%): -$3,780
Other income: $1,200
EGI: $73,020

Operating expenses: $26,000
NOI: $47,020

DSCR: $47,020 ÷ $26,940 = 1.75

This property has a strong DSCR of 1.75. It will qualify easily for financing and should get competitive terms.

How to Improve Your DSCR

Increase NOI. Raise rents. Add income streams. Reduce vacancy. Cut expenses. Every dollar added to NOI directly improves DSCR.

Put more money down. A larger down payment means a smaller loan and lower annual debt service. Going from 20% down to 25% down on a $400,000 property reduces your loan by $20,000 and your annual payment by roughly $1,600.

Get a lower interest rate. Shop multiple lenders. Even 0.25% lower on a $300,000 loan saves about $500/year in debt service, which directly improves DSCR. Points and rate buydowns can also help if the deal is marginal.

Extend the loan term. A 30-year mortgage has lower monthly payments than a 15 or 20-year. If you need to hit a DSCR threshold to qualify, the longer amortization helps. You pay more interest over time, but you get the loan.

Common Mistakes

Using gross income instead of NOI. DSCR uses net operating income, not gross rent. If you tell a lender your DSCR is 2.0 but you used gross rent, the real DSCR after expenses could be 1.1. They will catch this.

Forgetting to include all debt. If the property has a first mortgage AND a second mortgage or HELOC, include ALL debt payments in the annual debt service calculation.

Not stress-testing. What if vacancy goes from 5% to 10%? What if one unit is down for 3 months for renovation? Run your DSCR with conservative assumptions, not best-case scenarios.

Frequently Asked Questions

What DSCR do lenders require?

Most require 1.2-1.25 minimum. Some DSCR-specific lenders go as low as 1.0 but charge higher rates. The higher your DSCR, the better your loan terms.

How do you calculate DSCR?

DSCR = Net Operating Income ÷ Annual Debt Service (total mortgage payments for the year). A DSCR of 1.25 means the property earns 25% more than the mortgage requires.

What happens if my DSCR is below 1.0?

The property does not cover its mortgage. You are subsidizing it from other income. Most lenders will not finance this, and existing properties with sub-1.0 DSCR should be evaluated for rent increases or refinancing.