DSCR formula
The DSCR formula divides income by debt service. What each lender counts as income and as debt service can differ.
The DSCR formula rental lenders use
Gross monthly rent ÷ PITIA = DSCR
PITIA covers one month of principal, interest, property tax, insurance plus association dues. The rent is either the lease amount or, when the unit sits vacant or the lease falls below market, the market rent listed in the appraiser's rent schedule. No deduction is made for vacancy, management or repairs.
The debt service coverage ratio formula banks use
Net operating income ÷ annual debt service = DSCR
A year of rent minus vacancy, management, repairs, tax and insurance gives you NOI (net operating income). Annual debt service covers twelve months of principal and interest. Larger buildings financed with commercial loans or bank portfolio loans usually use this version.
Three worked examples using one rental
This rental has monthly rent of $1,800, a $200,000 loan at 7.5%, property tax of $250 each month, $150 for insurance and no HOA.
| Case | Monthly P&I | PITIA | DSCR |
|---|---|---|---|
| 30-year, fully amortizing | $1,398 | $1,798 | 1.00 |
| 40-year, fully amortizing | $1,316 | $1,716 | 1.05 |
| 30-year, interest-only | $1,250 | $1,650 | 1.09 |
A bank using NOI would begin with $21,600 of yearly rent on that same property. After deducting $6,000 for vacancy, management, repairs, tax plus insurance, NOI equals $15,600. With twelve payments of $1,398, debt service reaches $16,781. The bank's DSCR is 0.93: under 1.00 for a file scored at 1.00 by a DSCR lender.
Working the formula backwards
To work out the rent a target requires, reverse the formula: rent needed is the target multiplied by PITIA. At 1.25, the 30-year case requires $2,248 a month. To find the largest loan, divide rent by the target, then take away tax, insurance and HOA. Divide what remains by the monthly payment for each borrowed dollar.
You can use our DSCR loan calculator to calculate the division and the rent needed. The what is a good DSCR page identifies the largest loan at each common minimum.