How to Calculate DSCR: Formula, Worked Examples, and the Mistakes That Kill Deals

DSCR is the single number that determines whether a rental property loan gets approved, what rate tier it lands in, and how much leverage you're allowed. The formula takes thirty seconds. Getting the inputs right — which income counts, which expenses count, which don't — is where investors lose deals. This post shows the exact calculation lenders run, three worked examples, and the mistakes we see most often.

The DSCR formula

DSCR = Gross Monthly Rental Income ÷ Monthly PITIA

PITIA stands for:

• Principal — the amortizing portion of your payment
• Interest — at the note rate
• Taxes — real property taxes (monthly)
• Insurance — hazard/landlord policy, plus flood if required
• Association dues — HOA/condo fees if any

A DSCR of exactly 1.00 means rent equals carrying cost. 1.25 means rent covers the payment with 25% headroom. 0.90 means the property runs $0.90 of rent per $1.00 of payment — possible to finance, but at worse terms.

What's deliberately not in the lender's PITIA: property management, maintenance, capex reserves, utilities, and vacancy. The lender's DSCR is a credit metric, not a cash-flow statement. A property at 1.05 DSCR is almost certainly losing money after real expenses.

What counts as income

The "lower of lease or market" rule trips people up in both directions. If you inherited a tenant paying $400 under market, the lender qualifies you on $400-under-market rent. If you signed a generous lease with a relative at $300 over market, the appraisal caps you at market. Markets with strong, well-documented rents — see the DSCR hot cities leaderboard — reduce this appraisal risk.

Worked example 1: Midwest cash-flow market

A typical deal in a high rent-to-price metro (numbers illustrative, in the spirit of current Cleveland-tier markets):

Result: approvable at most lenders, but below the 1.25 best-pricing tier. Options: buy the rate down (~$25/mo of P&I per point bought, illustratively) or drop to 70% LTV. Note how the 2.2% property tax rate — common in Ohio — ate the ratio. This is why our market scoring penalizes high-tax metros even when rent-to-price looks great.

Worked example 2: the coastal trap

Same effort, radically worse ratio. At 0.85 you're into no-ratio/sub-1.0 programs: expect 65–70% max LTV and a rate premium of roughly 50–100bps (illustrative). To reach DSCR 1.0 this deal needs about $440 more rent or about $150K less loan — meaning ~42% down. The deal isn't financeable at standard leverage no matter how strong the buyer is, because DSCR loans qualify the property.

Worked example 3: interest-only rescue

Same coastal property, but with a 10-year interest-only DSCR loan at an illustrative 7.50% IO rate:

• IO payment: $337,500 × 7.50% ÷ 12 = $2,109
• PITIA: $2,109 + $590 = $2,699
• DSCR: $2,450 ÷ $2,699 = 0.91

Better, still under 1.0. IO structures add roughly 0.06–0.15 to a DSCR ratio and are a legitimate tool — but if IO can't get you to 1.0, the market is telling you the price is wrong, not the loan. Run your own scenarios in the DSCR calculator; it handles amortizing and IO math instantly.

The five mistakes that kill DSCR deals

1. Using pro-forma rent instead of appraisal-defensible rent. Your spreadsheet says $1,800; the comps say $1,550. The lender uses $1,550. Pull actual rental comps before you offer.

2. Forgetting taxes get reassessed at sale. The seller's tax bill reflects their old assessed value. Many counties reassess on transfer — your PITIA should use purchase price × local tax rate, not the listing's tax history. In Texas or Illinois this routinely swings DSCR by 0.1+.

3. Quoting DSCR at yesterday's rate. Pricing floats with the 10-year Treasury until you lock. A 25bp move changes the example-1 deal's DSCR by ~0.03 — enough to cross a tier threshold. Check the live 10Y and indicative DSCR ranges the morning you run numbers.

4. Ignoring HOA dues. The second "A" in PITIA. A $250/mo HOA on a $200K condo is frequently the difference between 1.25 and 1.05.

5. Confusing lender DSCR with cash flow. Lender DSCR excludes management (8–10%), maintenance (5–10%), capex, and vacancy (5–8%). A rule of thumb: a deal needs roughly 1.30–1.40 lender DSCR to be genuinely cash-flow positive with professional management. Underwrite to your number, not the lender's floor.

DSCR thresholds cheat sheet

FAQ

Is a higher DSCR always better? For approval and pricing, yes. For portfolio strategy, a very high DSCR can signal under-leverage — capital sitting in equity that could be redeployed. Most scaling investors target lender DSCR of 1.2–1.4 at purchase.

Does DSCR use gross or net rent? Gross scheduled rent. Lenders do not deduct operating expenses other than taxes, insurance, and HOA (which sit in PITIA).

How do I calculate DSCR for a short-term rental? Same formula, but the income number comes from trailing-12 STR revenue or an accepted projection, often haircut to ~80%. Details in the STR financing guide.

What DSCR do I need to refinance? Same thresholds as purchases for rate/term refis; cash-out refis typically want 1.1–1.25 at 70–75% max LTV.

Can DSCR change between application and closing? Yes — via the appraisal rent figure, updated tax estimates, or rate movement before lock. Build 0.05–0.10 of cushion into your offer math.

---

All rates and pricing tiers above are illustrative, not offers. For the full picture of how these loans work end-to-end, read the complete DSCR loan guide, then run your deal.