DSCR short for Debt Service Coverage Ratio, is the main number lenders look at when approving a DSCR loan. It tells them whether the property’s rental income can comfortably cover the monthly payment. The higher the ratio, the stronger the deal looks.
The Basic Formula #
Lenders calculate DSCR using a simple equation:
DSCR = Gross Rental Income ÷ PITIA
PITIA includes:
- Principal
- Interest
- Taxes
- Insurance
- HOA dues (if any)
A DSCR of 1.00 means the rent just covers the payment. Anything above that shows positive cash flow.
How Lenders Determine Rental Income #
To keep things consistent, lenders use the lower of:
- The current lease, or
- The market rent from the appraisal (Form 1007 or 1025)
If your lease shows higher rent than the 1007, you may need proof you’re actually collecting that amount, usually canceled checks or payout history.
For vacant homes, lenders rely purely on the 1007/1025 market rent.
Short-Term Rental (STR) Variation #
For Airbnb or VRBO properties, income is handled differently:
- Refinance: Lenders typically want 12 months of payout history
- Purchase: Many lenders will use up to 75% of projected income, supported by a 1007 or property manager estimate
Some lenders also require a minimum DSCR (often 1.00+) for STR deals.
Why DSCR Numbers May Look Different Across Lenders #
Each lender may apply their own guidelines, which might include:
- Vacancy factors
- Stress-testing payments
- Minimum DSCR requirements
- LTV adjustments based on FICO or loan size
These differences can cause DSCR calculations to vary slightly between lenders.
Summary #
Lenders calculate DSCR by comparing rental income to the property’s PITIA payment. They verify rent using a lease or appraisal and apply separate rules for short-term rentals. A higher DSCR translates to stronger cash flow, and usually better terms for the investor.