How to Calculate a DSCR Loan – Step By Step
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From figuring out expenses to doing the math… Here’s how to calculate a DSCR loan.
The more you know about DSCRs, the more power you have when you go to buy or refinance.
When you practice the numbers yourself, the less you have to rely on a lender to tell you if a deal is good or not.
Download your own DSCR calculator here. Follow along with your own numbers as we go through an example of how to calculate a DSCR loan.
What Is a DSCR?
DSCR means debt service coverage ratio. It’s a loan for rental properties that hinges on cash flow.
A DSCR loan will be a useful product in your real estate investing career. It requires no income verification and no work or investment history. These loans only require that the property’s income is the same (or higher than) the expenses.
Cash flow is always important to you as an investor, and for DSCR loans, it matters just as much to your lender. The better your cash flow, the better LTV and rates you can get.
But even if your property has negative cash flow, you still can get DSCR loans. You’ll just have to pay for it when it comes to the LTV and interest rate.
Calculate a DSCR Loan Expenses
You can follow along with your DSCR loan calculator (free download here). We’ll fill out these form to show each step of how to calculate a DSCR loan.
Rent Income & Loan Amount
Firstly, you need to estimate your loan amount and your rent income. If you have a deal in front of you, you probably have a good idea of the loan amount you’ll need to be able to afford the property.
As for rent, you can get realistic amounts from online sources. Look at Zillow or Rent.com to find the market rate for rent in the property’s neighborhood.
Let’s keep it simple for our example and say our loan is $200,000, and our rent income is $2,000.
What Expenses Count in a DSCR Loan?
We know our income (rent), but now we need to figure out our costs.
The expenses considered in a DSCR loan DO include:
✔ HOA fees
Expenses NOT considered in a DSCR loan are things like:
✘ Property management fees
To estimate the taxes on the property, you could use a property tax calculator like this one. If you need an estimate on insurance, you can try this home insurance calculator. You can figure out HOA fees by contacting the HOA, if that applies to your property.
If any of these costs are charged annually, then you’ll need to divide by 12 to break it down into a monthly cost.
Let’s take a look at what information we have now for our example DSCR loan:
Calculating Loan Cost
Secondly, DSCR lenders will offer many types of the loans – fixed-rate mortgages, interest-only, ARMs, etc. You need to find what best fits you, and to do that, you’ll have to run all the numbers.
To calculate each of the amortized loans, you can use an amortization calculator like this one. Add in your information – loan amount, interest rate, and loan length.
We’re going to use an 8% interest rate for our example, since that’s the anticipated average for next year.
In reality, each loan and lender will have a different interest rate. Additionally, the interest rate may fluctuate depending on your qualifications and DSCR. You can get this information from your lenders to plug into your calculator.
We’ll use three common loans for this example: a 30-year fixed, 40-year fixed, and interest only loan.
If we had a 30-year mortgage for $200,000 at 8%, our monthly payment would be $1,467.
For a 40-year fixed with the same info, payments would be $1,390.
For interest-only, you can calculate the loan fairly simply yourself. Multiply the loan amount by the interest rate (e.g., 200,000 × .08 = 16,000). That gives you the yearly interest, then you divide it by 12 to get the monthly payment. For our example, that’s $1,333.
So what do you do with these numbers? How do you know which loan is best?
It depends on your priorities. To have the most cash flow, the lowest number is best (in this case, interest-only). If you need something that amortizes, a 30-year would probably be best.
But you don’t really know which loan will be best for you until you calculate the DSCR.
How to Calculate the DSCR
Loan LTVs and rates on a DSCR are determined by the debt service coverage ratio itself. Now that we have all our raw information, we can plug it into our DSCR calculation to get the ratio.
Here’s how you get the numbers you need:
Add up your expenses (taxes, insurance, and HOA fees) with each loan’s payment amount. Then divide rent by all those expenses.
Costs + Mortgage = Total Expenses
Rent ÷ Total Expenses = DSCR Ratio
Here’s an example of what it would look like with an example using a $200,000 loan and an 8% interest rate:
We want the DSCR to at least equal 1.
Over 1 is ideal. This is a higher cash flow, and you’ll get a better loan.
Less than 1 means negative cash flow, and means you might have to look at a negative DSCR or a no-ratio loan instead.
<1 = Negative Cash Flow
At 1 = Rent = Expenses
>1 = Positive cash flow
Help with How to Calculate a DSCR Loan
Do you have a deal with a DSCR of 1 or more? Do you need help finding out?
If you have any questions, we’d be glad to help. If you have a deal, we can run the numbers for you. Email us at Info@TheCashFlowCompany.com.
You have choices in the DSCR world. Let us help you find them!