Guides · 2 minute read
DSCR explained
The ratio lenders use to ask whether a property earns enough to pay its own loan.
The debt service coverage ratio, or DSCR, measures whether a property’s income covers its loan payments. Lenders use it to judge investment properties, and investors can use it as a safety check on their own deals.
Annual debt service is the total of your mortgage principal and interest payments for the year. Net operating income is rent after vacancy and operating expenses, before debt, exactly as in a cap rate calculation.
How to read the number
- Above 1.0: the property’s income covers the loan payments.
- Exactly 1.0: income just covers the payments, with no cushion.
- Below 1.0: the property does not cover its own debt, and you would fund the gap from other income.
A worked example
A rental earns $21,000 a year in NOI. Its mortgage payment is $1,300 a month, or $15,600 a year. DSCR is $21,000 ÷ $15,600, about 1.35. That means income is 35% more than the debt payments.
What lenders look for
Requirements vary by lender and loan type. Many commercial and investor lenders want a DSCR of at least 1.20 to 1.25 to provide a margin of safety. Some programs accept 1.0 or slightly lower, often with a larger down payment or a higher rate. Treat any figure here as a rough guide and ask lenders for their current minimums.
What is a DSCR loan?
A DSCR loan is an investor mortgage that qualifies you mainly on the property’s rental income instead of your personal income and tax returns. That can help self-employed investors or people with many properties. The tradeoffs are commonly a higher interest rate, a larger down payment, and sometimes prepayment penalties compared with a conventional loan. Compare the full terms, not only the headline rate.
Find your cash flowThe rental analyzer shows annual NOI and the mortgage payment, the two numbers you need for DSCR.A strong DSCR does not make a good deal by itself. It says nothing about the price you paid, your cash invested or the condition of the property. Use it alongside cap rate and cash-on-cash return.
Common questions
What is DSCR?
The debt service coverage ratio is annual net operating income divided by annual debt service. It shows how many times a property’s income covers its loan payments.
What is a good DSCR for a rental property?
Lenders often want 1.20 to 1.25 or higher, though some accept about 1.0. Above 1.0 means income covers the loan payments, and a bigger cushion is safer.
Does DSCR include taxes and insurance?
The numerator, NOI, already subtracts property taxes, insurance and other operating costs. The denominator is only loan principal and interest. Some lenders use a variation that includes taxes and insurance in the payment, so confirm their definition.
Is a DSCR loan a good idea?
It can be useful when you cannot or prefer not to qualify on personal income. Expect higher rates and bigger down payments than conventional loans and compare the full costs.
Educational content, not investment, tax, legal or lending advice. Last updated .