# How to Calculate a DSCR Loan Ratio

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Could this be the right leverage for your deal? Here’s how to calculate a DSCR loan.

“DSCR” stands for “debt service coverage ratio.” It’s a number that explains cash flow, or money coming in vs money going out.

In a real estate rental situation, there are two important numbers to figure out this ratio:

1. Income – rent from tenants.
2. Expenses – mortgage principal and interest, taxes, insurance, and any HOA fees.

## What Ratio Do DSCR Lenders Take?

If your income 100% covers your expenses with none left over, that’s a ratio of 1:1. Most DSCR lenders require 1:1 as a standard minimum.

Some lenders will go as low as .75, which is called no ratio. That’s if your income from your rental leaves 25% of the property’s expenses left over.

But the ideal use of a DSCR loan is when you have a higher ratio. This would mean your rent is higher than your expenses, and your property has positive cash flow.

## How Do You Calculate the DSCR?

So now you understand what the ratio is… But how do you calculate your DSCR ratio?

You need the two numbers:

1. The rent you’ll charge (income)
2. Mortgage principal and interest, taxes, insurance, and HOA fees (expenses)

Note: utilities and property management costs are not considered expenses on a DSCR loan.

Once you add up your expenses, you have to find out if your rent covers them. To get the ratio number, you divide income by expenses.

## DSCR Loan Calculation Example

Here’s a simple example.

Let’s say you have a single-family property, and the interest and mortgage is \$1,000/month. Taxes are \$250, property insurance is \$150, and there are no HOA fees.

Your total monthly expenses adds up to \$1,400.

Now let’s say the rent you can charge based on your property’s location is \$1,600.

So, you can divide \$1,600 (income) by \$1,400 (expenses). You get a ratio of 1.14.

A 1:1 ratio (the typical minimum) can also be called 1. So our 1.14 is higher than the minimum. With a ratio higher than one, you’ll have a much better shot at finding a DSCR lender who will work with you.

If the market in our example went up, maybe you could charge \$2,000/month for rent. If your expenses were still \$1,400, your ratio would be 1.42. With that ratio, you could likely get a bigger loan and lower rate.

The higher your ratio, the better your opportunities for rates and terms. The lender sees it like this: the more income coming into the property, the more guaranteed it is you’ll pay them back.

## Using a DSCR Loan Calculator

If you’d rather skip the manual math, you can download our simple, free DSCR loan calculator here.