What Is DSCR (Debt Service Coverage Ratio)?

Short answer

DSCR is the property's gross monthly rent divided by its full monthly payment (principal, interest, taxes, insurance and HOA). A rent of $3,000 against a payment of $2,500 is a DSCR of 1.20. DSCR loans qualify the investor on this ratio instead of personal income, tax returns or DTI.

Definition

The debt service coverage ratio compares the income a rental property produces with the debt payment it must cover. A DSCR of 1.00 means rent exactly equals the payment; above 1.00 the property covers itself with room to spare, below 1.00 it runs at a shortfall.

Worked example

You are buying a two-bedroom condo in Doral for $450,000 with 25% down ($112,500), so the loan is $337,500. Suppose the lender's payment estimate (principal and interest) is $2,300, taxes $650, insurance $200 and HOA $450, for a total payment of $3,600. The appraiser's rent schedule says market rent is $3,950. DSCR = $3,950 / $3,600 = 1.10. The property covers its own payment with about 10% cushion.

How DSCR is calculated

Rent comes from the current lease or from the appraiser's rent schedule (Form 1007); most lenders use the lower of the two. The payment is the full PITIA: principal, interest, taxes, insurance and association dues.

DSCR = monthly rent / monthly PITIA. Many lenders price in tiers, for example above 1.25, 1.00 to 1.24, and below 1.00. Some allow DSCR under 1.00 with a larger down payment or more reserves.

• Vacant property: the appraiser's market rent is used.
• Short-term rentals: some lenders accept 12 months of platform statements.

Why it matters to investors

DSCR lets an investor close in an LLC, skip tax returns and keep adding properties without hitting a personal DTI wall. The trade-off is a higher down payment and a higher rate than a conventional owner-occupied loan. Rates vary daily; call for today's pricing.

If the DSCR comes in low, you can raise it by putting more down (smaller payment), choosing a lower-HOA building, or buying down the rate. See DSCR loans for program details.

In South Florida

Miami-Dade and Broward are among the most active DSCR markets in the country because so many buyers are investors, foreign nationals or self-employed. The challenge is the denominator: condo HOA dues, windstorm insurance and property taxes reassessed at purchase push the payment up and the DSCR down. Short-term rental income (Airbnb) is accepted by some lenders and not others, and many condo associations prohibit it. DSCR loans are business-purpose loans for non-owner-occupied property.