For many real estate investors, especially those who are self-employed or have non-traditional income, qualifying for a conventional loan can be a frustrating process. Lenders get stuck on your personal tax returns, often overlooking the strength of the investment itself. This is where DSCR loans change the game. With this type of financing, the property qualifies for the loan, not you. The lender’s entire decision hinges on the Debt Service Coverage Ratio, which proves the rental income can support the mortgage. Using a dscr calculator rental property is your first step to see if your investment can stand on its own two feet. In this article, we’ll break down how this process works and what you need to prepare for a successful application.
Key Takeaways
- Let the property qualify itself: DSCR is a simple formula (Gross Rental Income ÷ Total Debt) that shows if a property can cover its own costs. Lenders prioritize this number over your personal W-2, making it a powerful tool for investors.
- Get your numbers right for a true picture: Your DSCR is only as good as the data you use. Avoid common pitfalls by using realistic rent estimates, accounting for all expenses (including taxes and insurance), and never forgetting to factor in potential vacancy periods.
- Treat your DSCR as a tool for growth: Your DSCR isn’t a static number—it’s a score you can actively improve. Take control by increasing rental income, reducing operating expenses, or refinancing your loan to strengthen your financial position for future deals.
What is DSCR and Why Does It Matter for Your Rental?
If you’re diving into real estate investing, you’ll hear the term “DSCR” a lot. So, what is it? DSCR stands for Debt Service Coverage Ratio. Think of it as a quick financial health check for your rental property. In simple terms, it’s a number that shows whether a property generates enough income to cover its mortgage payments and related expenses.
Lenders use this ratio to understand the risk of a loan and figure out the maximum loan amount a property can support. A solid DSCR tells a lender that your property’s cash flow is strong enough to handle the debt you’re taking on. For you as an investor, understanding your DSCR is crucial because it directly impacts your ability to secure financing and grow your portfolio. It’s one of the most important metrics in your toolkit.
What is Net Operating Income (NOI)?
Before you can find your DSCR, you need to know your Net Operating Income, or NOI. Your NOI is your property’s total income minus all its operating expenses. To calculate it, start with your gross rental income—the total rent you collect over a year. From that, subtract all the costs required to keep the property running. This includes things like property taxes, insurance, maintenance, repairs, property management fees, and utilities. What’s not included in this calculation is your mortgage payment. The NOI shows you how profitable the property is on its own, before debt is factored in, giving you a clear picture of its performance.
Breaking Down Total Debt Service
The other key piece of the DSCR puzzle is your Total Debt Service. This might sound complicated, but it’s simply the total amount of money you’ll spend on your mortgage payments over one year. This figure includes the four main components of your loan payment, often called PITI: principal, interest, taxes, and insurance. If your property is part of a homeowners association, you’ll also need to add your annual HOA fees to this total. Your Total Debt Service represents the complete annual cost of financing the property, and it’s the core expense your rental income needs to cover.
Clearing Up Common DSCR Myths
One of the biggest myths about DSCR loans is that you need a high personal income to qualify. That’s simply not true. The beauty of these loan programs is that they focus on the property’s income-generating potential, not your personal W-2. The property itself is what qualifies for the loan. Another common misconception is that only large-scale, professional investors can use DSCR financing. In reality, these loans are a fantastic tool for anyone looking to build wealth through real estate, whether it’s your first rental property or your tenth. They provide a clear path to financing based on the quality of the investment.
How to Calculate Your Property’s DSCR
Calculating your Debt Service Coverage Ratio (DSCR) might sound complex, but it’s a straightforward process every real estate investor should master. Think of it as a quick financial health check for your property. It’s a single number that shows lenders how well your rental income covers your property’s debt and expenses. Understanding this calculation helps you see your property through a lender’s eyes and make smarter investment decisions. Let’s walk through the four simple steps to find your property’s DSCR.
Gather Your Income Data
First, you need to know how much money the property brings in. This is your gross rental income. For an existing rental, pull together your lease agreements and rent rolls to find the total monthly or annual rent you collect. If you’re evaluating a new property, research comparable rentals in the area to estimate a realistic potential rent. It’s important to use actual or highly realistic figures here, not just optimistic, best-case-scenario numbers. This income figure is the top half of the DSCR equation and the foundation of your entire calculation, so getting it right is key.
List Your Operating Expenses
Next, it’s time to tally up the costs. For DSCR calculations, lenders focus on a specific set of expenses known as PITIA. This acronym stands for Principal, Interest, Taxes, Insurance, and Association dues (like HOA fees). These are the core, non-negotiable costs of owning the property and paying back your loan. Be thorough when you list these out. You can find the principal and interest on your mortgage statements, property taxes on your county assessor’s website, and insurance costs on your policy documents. If you’re part of a homeowners association, don’t forget to include those monthly or annual dues.
Find Your Total Debt Service
Your total debt service is simply the sum of all the PITIA expenses you just listed. Add up your monthly principal, interest, taxes, insurance, and any HOA fees to get your total monthly debt service. For example, if your mortgage payment (principal and interest) is $1,200, your monthly property taxes are $250, your insurance is $100, and your HOA fee is $50, your total monthly debt service would be $1,600. This number represents the total amount you are obligated to pay each month. It’s the bottom half of the DSCR equation and shows the full weight of your property’s financial commitments.
Put It All Together: The DSCR Formula
Now you have all the pieces you need. The formula itself is simple:
DSCR = Gross Rental Income / Total Debt Service (PITIA)
Let’s use our numbers from the previous steps. Say your property generates $2,200 in monthly rent, and you calculated your total monthly debt service to be $1,600.
Your calculation would look like this: $2,200 / $1,600 = 1.375.
Your DSCR is 1.375. This number gives you a clear, immediate snapshot of your property’s ability to pay for itself. Different loan programs have different DSCR requirements, but now you have the key metric lenders will use to evaluate your investment property.
What Your DSCR Number Really Means
So, you’ve done the math and have your DSCR number. But what does it actually tell you? Think of your DSCR as a quick financial health report for your investment property. It’s a straightforward ratio that shows whether your property’s income is enough to cover its debt payments, plain and simple. For lenders, this number is a critical piece of the puzzle when they’re deciding whether to approve your loan. It gives them a clear, unbiased look at the property’s performance and helps them gauge how much risk is involved. A strong DSCR shows that you’re not just scraping by, but that your investment is financially sound.
Understanding your DSCR is about more than just getting a loan approved; it’s about making smart, confident investment decisions for your future. A healthy DSCR means your property is generating positive cash flow, which gives you the financial flexibility to handle unexpected repairs, plan for upgrades, or even start saving for your next investment property. On the other hand, a low DSCR can be a warning sign that your property is struggling to support itself financially. It’s a key indicator that helps you see the full picture. Let’s break down what the different DSCR numbers mean for you and your property.
A DSCR Below 1.0
If your DSCR comes in below 1.0, it’s a signal that your property isn’t generating enough income to cover its monthly mortgage and other debt payments. This is often called negative cash flow. In this situation, you’d have to dip into your personal savings each month just to keep things afloat. For lenders, a DSCR under 1.0 is a major red flag because it indicates a high-risk investment. It suggests the property isn’t financially self-sufficient, which can make it much harder to secure financing or prove the property’s long-term viability.
A DSCR of Exactly 1.0
A DSCR of exactly 1.0 means you’ve hit the break-even point. Your property’s income is just enough to cover its debt obligations—and not a penny more. While breaking even is certainly better than losing money, it leaves you with zero financial cushion. If an unexpected expense pops up, like a major appliance failure or a sudden repair, you won’t have any surplus cash flow from the property to handle it. Lenders see this as a tight spot, as there’s no room for error. It’s like living paycheck to paycheck with your investment; one small issue could disrupt your ability to make payments.
A DSCR Above 1.0
This is where you want to be. A DSCR above 1.0 indicates your property is generating more than enough income to pay its debts, resulting in positive cash flow. This extra money is your profit—you can use it to build your savings, reinvest in the property, or fund your next venture. The higher your DSCR, the more financially healthy your investment is. Lenders love to see a DSCR comfortably above 1.0 because it shows your property is not only self-sustaining but also profitable, making you a much more attractive and reliable borrower.
The “Magic Number” Lenders Want to See
While any DSCR over 1.0 is good, most lenders have a “magic number” they look for: typically around 1.20 to 1.25. Why this specific range? A DSCR of 1.25 means your property generates 25% more income than it needs to cover its debt. This 25% surplus acts as a safety net, giving the lender confidence that you can handle unforeseen vacancies or maintenance costs without missing a payment. Hitting this benchmark can significantly improve your chances of approval and help you qualify for the best loan programs and rates available. It proves your investment is not just surviving, but thriving.
What Factors Influence Your DSCR?
Your DSCR isn’t just a number you calculate once and forget. It’s a dynamic score that reflects the financial health of your investment property, and several key factors can cause it to shift. Understanding these influences is crucial because it gives you the power to improve your ratio, making your property more attractive to lenders and more profitable for you. From the neighborhood your property is in to the way you handle your bookkeeping, each element plays a role in determining whether your property is generating enough cash to cover its debts. Let’s look at the biggest factors that move the needle on your DSCR.
Location and Market Trends
Where your property is located has a huge impact on its income potential. A rental in a high-demand area with strong job growth and desirable amenities can command higher rents and attract reliable tenants, directly increasing your Net Operating Income (NOI). Lenders pay close attention to these local market trends because they indicate the stability and growth potential of your rental income. If you’re looking to improve your DSCR, analyzing the economic health of your property’s neighborhood is a great place to start. A thriving local market provides a solid foundation for a healthy cash flow, which is exactly what lenders want to see when they evaluate your loan application.
Consistent Rental Income
A property that brings in steady, predictable rent month after month is an investor’s dream—and a lender’s, too. Consistent rental income is the backbone of a strong DSCR. Lenders look at your property’s rental history to gauge its reliability. A track record of long-term tenants and minimal vacancies signals a low-risk investment. This stability helps you accurately assess the risk and return of your property and demonstrates to lenders that you can comfortably cover your debt payments. If your income fluctuates wildly, it creates uncertainty and can lower your DSCR, making it tougher to secure financing. Aim for a reliable income stream to keep your DSCR in a healthy range.
How You Manage Expenses
Your income is only half of the DSCR equation; how you manage your operating expenses is just as important. Every dollar you save on maintenance, insurance, property taxes, or management fees goes directly to your Net Operating Income, which in turn improves your DSCR. Keeping meticulous records is key. Lenders need to see a clear and accurate picture of your expenses to trust your NOI calculation. Engaging in regular financial reviews helps ensure your numbers are precise and can reveal opportunities to reduce your operating costs. Smart expense management shows that you’re a savvy investor who knows how to maximize profitability.
Your Property’s Vacancy Rate
It’s easy to get excited about your property’s potential monthly rent, but it’s a mistake to assume you’ll be collecting it 12 months a year. Every month your property sits empty, it generates zero income but still racks up expenses. This is why your vacancy rate—the percentage of time your property is unoccupied—is a critical factor in your DSCR. Lenders will always factor in a potential vacancy rate when underwriting a loan, even if you have a tenant right now. Many investors fail to account for vacancy periods when running their numbers, leading to an inflated DSCR and a surprise when they can’t get approved. A realistic vacancy estimate gives you a more accurate picture of your true cash flow.
Your Current Loan Terms
Finally, the details of your mortgage itself directly influence your DSCR. The “Total Debt Service” portion of the formula is determined by your loan’s principal and interest payments. A loan with a higher interest rate or a shorter repayment period will result in a larger monthly payment, increasing your total debt. This can shrink your DSCR, even if your property’s income is strong. This is why securing favorable financing is so important. By working with a lender to find the right loan program for your situation, you can structure your debt in a way that supports a healthy DSCR from day one, setting your investment up for long-term success.
How to Use a DSCR Calculator
A DSCR calculator is your best friend when you want a quick snapshot of your investment property’s financial health. Think of it as a simple tool that cuts through the noise and tells you if your property’s income is enough to cover its mortgage payments. Using one is straightforward, but the key is to have the right information on hand before you start. It’s a small step that can give you a huge amount of clarity on your investment and help you prepare for conversations with lenders.
What Information You’ll Need
To get an accurate result from a DSCR calculator, you’ll need to gather a few key details about your property first. Having these numbers ready will make the process quick and painless.
Here’s what you should have on hand:
- Monthly Rental Income: The total rent you expect to collect each month.
- Property Value: The current market value or purchase price of the property.
- Down Payment: The amount of cash you’re putting down.
- Loan Details: The interest rate and the length of the loan term (e.g., 30 years).
- Monthly Expenses: This includes your estimated monthly property taxes, insurance, and any HOA fees.
Finding the Right Calculator
You have a couple of options when it comes to finding a DSCR calculator. Many free online tools can give you a quick estimate and help you see what size loan you might qualify for. These are great for getting a general idea of where you stand. If you’re comfortable with spreadsheets, you can also build your own calculator in Excel to run different scenarios. For the most accurate picture, however, nothing beats speaking with a loan expert who can walk you through the numbers based on current rates and specific loan programs.
How to Read the Results
Once you plug in your numbers, the calculator will give you a single ratio. This number is your DSCR. The calculation itself is simple: it’s your gross rental income divided by your total mortgage payment, which includes principal, interest, taxes, insurance, and any HOA fees (often called PITIA). So, the formula is essentially Rent ÷ PITIA. A result of 1.0 means your income exactly covers your debt. A number above 1.0 means you have positive cash flow, and a number below 1.0 means you don’t have enough rental income to cover the mortgage on its own.
Why You Should Check Your DSCR Regularly
Your DSCR isn’t a “one-and-done” number. It’s a dynamic metric that you should check periodically, especially if you’re looking to grow your real estate portfolio. Regularly monitoring your DSCR helps you spot opportunities to improve your property’s financial performance. You might realize you can increase rent or find ways to lower your insurance costs. Over time, improving your DSCR can help you qualify for better loan terms on your next purchase or refinance. It’s a proactive way to manage your investment and strengthen your financial position as an investor.
Avoid These Common DSCR Calculation Mistakes
Your DSCR is a powerful number, but it’s only as reliable as the data you put into it. A simple miscalculation can paint a misleading picture of your property’s financial health, potentially leading to a rejected loan application or a poor investment decision. Think of it like a recipe—if you get one of the core ingredients wrong, the final dish just won’t turn out right.
Getting your numbers straight from the start is one of the most important steps in securing a DSCR loan. It shows lenders that you’ve done your homework and understand the true performance of your asset. Let’s walk through some of the most common slip-ups investors make so you can steer clear of them and calculate your DSCR with confidence. By avoiding these pitfalls, you’ll be in a much stronger position when you’re ready to apply for your loan.
Don’t Overestimate Your Rental Income
It’s easy to get excited and imagine your property will be rented out every single day of the year for top dollar. But reality often has other plans. When calculating your gross rental income, some investors make the mistake of using the best-case scenario, failing to account for market fluctuations or seasonal dips. A more accurate approach is to base your income projections on historical data from the property or comparable rentals in the area. This gives you a realistic figure that reflects what the property can actually generate over time, not just what you hope it will.
Don’t Underestimate Your Operating Expenses
On the flip side, it’s just as common to forget about all the little costs that add up. You might remember the big ones like property taxes and insurance, but what about landscaping, pest control, HOA fees, or routine maintenance? Underestimating your total expenses will artificially inflate your DSCR, making an investment look more profitable than it is. A good rule of thumb is to be meticulous with your list of expenses and even add a small buffer—say, 5%—for those unexpected repairs that always seem to pop up at the worst times.
Forgetting to Factor in Vacancy Rates
No property stays occupied 100% of the time. Between tenants, there will be periods when your property is empty and not generating any income. Neglecting to account for these potential vacancy periods is a critical error that can significantly skew your DSCR calculation. To avoid this, research the average vacancy rate for your specific market. A conservative estimate is typically between 5% and 8%. By subtracting this from your potential gross income, you create a much more accurate and dependable financial forecast that lenders can trust.
Simple Errors in Your Paperwork
Sometimes, the biggest mistakes are the simplest ones. A single typo, like inputting an incorrect property tax amount or mixing up monthly and annual figures, can throw off your entire calculation. Overstating income or understating expenses, even by accident, can lead to misleading results and a flawed investment strategy. The best way to prevent this is to slow down and double-check every number you enter. Having a second pair of eyes, like those of a trusted loan officer, review your figures can also help you catch small errors before they become big problems.
How to Improve Your Property’s DSCR
If your DSCR isn’t quite where you want it to be, don’t worry. It’s not a fixed number. Think of it as a financial health score for your property—one that you have the power to change. By focusing on the two main parts of the equation, your income and your expenses, you can take clear, actionable steps to strengthen your property’s financial standing. A higher DSCR not only looks great to lenders but also means more cash in your pocket each month. Let’s walk through four straightforward strategies to get your property’s numbers in top shape.
Increase Your Property’s Income
The most direct way to improve your DSCR is to increase your property’s Net Operating Income (NOI). Start by researching your local market to see if your current rental rates are competitive. If similar properties are charging more, it might be time for a rent increase. You can also explore adding new revenue streams. Could you charge for premium parking spots, add coin-operated laundry facilities, or offer tenants extra storage space for a monthly fee? Even small additions can create a meaningful increase in rental income over time, directly impacting your NOI and making your DSCR stronger.
Reduce Your Operating Expenses
On the other side of the NOI equation are your expenses. Take a close look at where your money is going and identify areas where you can trim costs without compromising the quality of your property. You could shop around for more affordable landlord insurance, appeal your property taxes if you believe they’re too high, or switch to energy-efficient lighting and appliances to lower utility costs. Performing regular preventative maintenance can also save you from expensive emergency repairs down the road. Streamlining these costs leads to a higher NOI and a more favorable financial position for your investment.
Restructure Your Current Debt
Your total debt service—the other half of the DSCR formula—is another area you can optimize. If you have an existing mortgage on the property, refinancing could be a powerful move. Securing a lower interest rate or extending the loan term can significantly reduce your monthly mortgage payment. This reduction in your debt obligation improves your cash flow and, in turn, your DSCR. At UDL Mortgage, we specialize in helping investors find the right financing, and our Lifetime Saver Program is designed to help you secure great rates for the long haul, ensuring your debt structure supports your investment goals.
Make Smart Property Upgrades
Strategic property upgrades can do more than just make your property look good—they can directly lead to higher rental income. The key is to focus on renovations that tenants value and are willing to pay more for. Modernizing a dated kitchen, updating a bathroom, adding an in-unit washer and dryer, or even improving the curb appeal can justify a higher rent. These strategic property upgrades not only enhance the property’s value but also have a positive and lasting impact on your DSCR by increasing your income potential.
What Lenders Require for DSCR Loans
Getting a DSCR loan is different from qualifying for a traditional mortgage, but that doesn’t mean there are no rules. Lenders still need to see that your investment is a solid one. Instead of digging through your personal pay stubs and tax returns, they focus almost entirely on the property itself. Think of it this way: the property is the one applying for the loan, and its income is its resume.
This approach is a game-changer for real estate investors, especially if you’re self-employed or have a complex financial history. It streamlines the process and puts the emphasis where it belongs—on the asset’s ability to generate cash flow. Lenders have a clear set of criteria to make sure the numbers work and the investment is sound for everyone involved. Let’s walk through exactly what they’ll be looking at.
How to Qualify
Qualifying for a DSCR loan is all about the property’s cash flow, not your personal income. This is the biggest difference from a conventional home loan. Lenders use the Debt Service Coverage Ratio to determine if the rental income is enough to cover the mortgage payments and other expenses. Because your W-2s and personal tax returns aren’t the main event, you can qualify even if you have other investments or non-traditional income streams. The central question is simple: does this property pay for itself? If the answer is yes and the DSCR meets the lender’s minimum, you’re on the right track.
Verifying Your Income
While your personal salary isn’t the focus, lenders do need to verify a few key things to assess the overall risk. They typically look at three main areas. First is the property’s cash flow, which is confirmed through a rental analysis and appraisal. Second is your credit score; a strong credit history shows you have a good track record of managing debt. Finally, lenders often consider your experience as a real estate investor. If you already own other rental properties, it demonstrates you know how to manage them successfully. These factors help build a complete picture of you as a borrower and the viability of your investment.
The Property Appraisal Process
The property appraisal is a critical step. An appraiser will determine the property’s current market value and, just as importantly, its fair market rent. This rental analysis, often done using a Comparable Rent Schedule, confirms the income side of the DSCR equation. It’s important to know that if your property is vacant at the time of the loan application, many lenders will only use a percentage of the projected rent—typically 90%—in their calculations. This is a conservative measure to account for potential vacancy, so it’s a good idea to factor that into your own numbers beforehand.
Understanding Lender Terms
Every lender has a minimum DSCR they require, and it’s a key part of their loan programs. While a DSCR of 1.0 means the property breaks even, most lenders want to see a bit of a cushion. Many set their minimum between 1.15 and 1.25, which shows the property generates enough income to cover its debts with some cash left over. A higher DSCR not only makes your application stronger but can also help you secure better loan terms and a more favorable interest rate. When you’re ready to move forward, working with a lender who understands investor needs can make all the difference.
Next-Level DSCR Tips for Serious Investors
Once you’ve mastered the basic DSCR calculation, you can start using it as a powerful tool to guide your investment strategy. It’s more than just a number you need to qualify for a loan; it’s a lens through which you can view your entire real estate business. For serious investors, DSCR becomes a key performance indicator that informs when to buy, how to finance, and where to optimize. Thinking beyond a single property can help you build a more resilient and profitable portfolio.
Understanding your lender’s expected DSCR is the first step, but the real magic happens when you use that knowledge to evaluate potential properties and map out your financing strategies. By treating DSCR as a dynamic metric, you can proactively manage your assets, anticipate market shifts, and make decisions that set you up for long-term success. Let’s look at a few ways you can take your DSCR analysis to the next level.
Analyze Your Entire Portfolio’s DSCR
Instead of looking at each property in isolation, calculate the DSCR for your entire portfolio. This gives you a bird’s-eye view of your overall financial health. You might discover that a high-performing property is masking the poor performance of another, or that your overall cash flow is stronger than you realized. This holistic view is exactly what lenders want to see. It demonstrates that you’re a savvy investor who understands the big picture. A portfolio-wide analysis also helps you identify which properties to focus on improving and which are your cash-flow stars, guiding your strategy for future acquisitions and financing through different loan programs.
How Market Timing Affects DSCR
Your DSCR isn’t set in stone—it can fluctuate with the market. A rise in local rental demand could allow you to increase your gross rental income, which improves your DSCR. On the other hand, rising property taxes or insurance premiums can increase your operating expenses and lower it. Serious investors pay close attention to market trends. By anticipating these changes, you can make proactive adjustments, like refinancing to a better rate before interest rates climb or making small upgrades to justify a rent increase. Staying ahead of the curve helps you maintain a healthy DSCR and qualify for better loan terms when you need them.
Fit DSCR into Your Long-Term Strategy
DSCR is a critical tool for making informed investment decisions that align with your long-term goals. Are you focused on aggressive growth or stable, long-term cash flow? A lower DSCR might be acceptable for a property in a rapidly appreciating area, while a higher DSCR is essential for a property intended to generate steady income. Use the DSCR calculation to compare different investment opportunities and assess their risk and return profiles. By integrating this metric into your strategic planning, you can build a portfolio that truly reflects your financial objectives. For more insights, you can always learn from experts who share their strategies.
Use DSCR to Manage Risk
At its core, DSCR is a measure of risk. A property with a high DSCR has a significant cash flow buffer to cover unexpected expenses, like a major repair or a sudden vacancy. A low DSCR, however, indicates that your margin for error is slim. You can use DSCR to filter potential deals and immediately discard properties that are too risky for your comfort level. This financial discipline prevents you from over-leveraging and protects your portfolio from unforeseen downturns. Think of it as your personal financial stress test for every property you consider adding to your portfolio.
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Frequently Asked Questions
What DSCR do lenders really want to see? While any DSCR over 1.0 means your property is generating enough income to cover its debt, most lenders look for a bit more of a safety net. Typically, the target is a DSCR of 1.20 or higher. This shows them that your property brings in 20% more income than what’s needed for the mortgage payment. This cushion gives lenders confidence that you can handle an unexpected vacancy or a sudden repair without missing a payment, making your loan a much lower risk.
Do I need a high personal income to get a DSCR loan? No, and that’s the real beauty of this type of financing. DSCR loans are designed to focus on the investment property’s income potential, not your personal salary. Lenders are primarily concerned with whether the property itself generates enough cash flow to cover its own mortgage payments. This makes it a fantastic option for self-employed investors or anyone whose income doesn’t fit into a traditional W-2 box.
How is rent calculated for a vacant property? This is a great question. If your property doesn’t have a tenant when you apply, the lender will order an appraisal that includes a Comparable Rent Schedule. An appraiser will analyze similar rental properties in the area to determine a fair market rent for your unit. It’s important to know that lenders often use a conservative figure, like 90% of that projected rent, in their final calculation to account for the risk of vacancy.
What’s the difference between the expenses used for DSCR and my total property expenses? The DSCR calculation uses a specific set of expenses often called PITIA, which stands for Principal, Interest, Taxes, Insurance, and Association (HOA) fees. This figure represents your total housing debt. It doesn’t include other operating expenses like maintenance, property management, or utilities. Those costs are used to find your Net Operating Income (NOI), but for the simple DSCR formula lenders use, they focus strictly on the core debt obligation.
Can I still improve my DSCR if I already have a mortgage? Absolutely. Your DSCR is a dynamic number, not a permanent one. You can work on improving it at any time by focusing on the two parts of the equation. You can increase the property’s income by making strategic upgrades that justify a higher rent. You can also work to lower your total debt service by refinancing your mortgage to secure a lower interest rate or a longer loan term, which would reduce your monthly payment.
