What Does It Mean?
Debt Service Coverage Ratio (DSCR) is a measure of a rental property’s income compared to the expenses associated with financing that property. Higher numbers indicate more free cash flow from the property, which equates to a more profitable investment and (from the lender’s perspective) a safer loan. When obtaining a rental loan for your investment property, the DSCR will be a primary factor (along with LTV) in determining how much money you will be allowed to borrow.
How Is DSCR Calculated?
To calculate DSCR, divide the monthly rental income by the total of your monthly loan payment (P&I), hazard insurance and tax payments, and any condo or HOA dues.
Monthly Rent / (Monthly loan payment + (insurance premiums / 12) + (annual property tax / 12) + monthly HOA dues)
How Does It Affect My Hard Money Loan?
DSCR values above 1.0 mean that the anticipated income from the rental property will cover the monthly PITI payments; however, this does not take into account maintenance and repair costs or periods of vacancy. For this reason, most private lenders will require DSCRs above 1.0. If your DSCR is too low, your loan amount will need to be reduced during underwriting (which reduces your monthly loan payment, thereby increasing DSCR). This may result in a loan amount that is less than otherwise allowed by the lender’s LTV calculation, so it’s important to understand your investment property’s DSCR before applying for a rental loan.