The Debt Service Coverage Ratio is the most important number in rental property lending. Here is exactly what it means, how to calculate it, and what ratio you need.
The Debt Service Coverage Ratio measures whether a rental property generates enough income to cover its mortgage payment. It is the single most important metric lenders use when evaluating DSCR loans — a type of investment property mortgage that qualifies borrowers based on property cash flow rather than personal income. If your property earns more than it costs to finance, your DSCR is above 1.0 and you are in positive territory.
The concept is straightforward. A DSCR of 1.25 means the property generates 25% more income than needed to pay the mortgage. A DSCR of 1.0 means income exactly equals the payment — breakeven. Below 1.0 means the property loses money each month before the mortgage is covered.
Use our free DSCR calculator to get your ratio instantly.
Free DSCR Calculator →The formula is simple division.
A ratio above 1.0 means the property generates more income than the mortgage costs.
Net Operating Income is your gross monthly rental income minus all operating expenses. Operating expenses include property taxes, homeowners insurance, HOA fees, property management fees (typically 8–10% of rent), maintenance reserves (5–10% of rent), and a vacancy allowance (5–8%). NOI does not include your mortgage payment — that is the debt service side of the equation.
Total Debt Service is your monthly mortgage payment — principal and interest. Some lenders calculate DSCR using only P&I while others use the full PITIA (principal, interest, taxes, insurance, and association dues). Our calculator uses the industry standard method that separates operating expenses from debt service for clarity.
Start with a single-family rental purchased for $350,000 with monthly rent of $2,400. Here is the full calculation.
Gross rent is $2,400 per month. Subtract operating expenses: property taxes ($350/month), insurance ($150/month), property management at 8% ($192/month), maintenance reserves at 5% ($120/month), and vacancy allowance at 5% ($120/month). Total expenses are $932 per month. NOI = $2,400 − $932 = $1,468 per month.
The loan is $262,500 (75% LTV) at 7.5% interest on a 30-year term. Using standard amortization, the monthly principal and interest payment is $1,836.
DSCR = $1,468 ÷ $1,836 = 0.80. This property has a DSCR below 1.0, meaning it does not generate enough income to cover the mortgage. The investor would need to increase rent, make a larger down payment, or find a lower rate to improve this ratio.
This is exactly why running the numbers before making an offer matters. A property that looks profitable on a napkin calculation often falls short once you include all operating expenses. The DSCR calculator accounts for every line item so there are no surprises.
| DSCR Range | Rating | What It Means for Your Loan |
|---|---|---|
| 1.50+ | Excellent | Best rates and terms available, most lender options, strong cash flow cushion |
| 1.25–1.49 | Strong | Qualifies for most DSCR programs, competitive rates, up to 80% LTV |
| 1.0–1.24 | Adequate | Meets minimum for many lenders, standard rates, may face some restrictions |
| 0.75–0.99 | Below Breakeven | Limited lenders, higher rates, 25–30% down required, additional reserves needed |
| Below 0.75 | Weak | Most DSCR programs unavailable, consider conventional or portfolio options |
Most lenders target a minimum DSCR of 1.0, but the sweet spot is 1.25 or higher. At 1.25+ you unlock the best rates, highest leverage, and widest selection of lenders. The difference between a 1.15 and a 1.25 DSCR can mean 0.5% lower rate and thousands saved over the life of the loan.
Investors often confuse DSCR with other property metrics. Each measures something different and serves a different purpose.
| Metric | Formula | What It Measures | When to Use |
|---|---|---|---|
| DSCR | NOI ÷ Debt Service | Can the property cover its mortgage | Loan qualification |
| Cap Rate | NOI ÷ Property Value | Return on total investment | Comparing deals regardless of financing |
| Cash-on-Cash | Annual Cash Flow ÷ Total Cash Invested | Return on your actual cash invested | Evaluating your personal return |
| GRM | Property Price ÷ Annual Gross Rent | Price relative to income (quick screen) | Initial deal screening |
DSCR is the metric your lender cares about. Cap rate and cash-on-cash are the metrics you should care about as an investor. Use DSCR to qualify for financing, then use the others to decide if the deal is worth doing.
Try the free DSCR calculator — test income scenarios, compare rates, and see your qualification tier instantly.
Free DSCR Calculator →Overstating rental income is the most common error. Investors use the asking rent rather than realistic market rent, or they forget to apply a vacancy allowance. Lenders will use either your actual lease rate or an appraised market rent from a 1007 rent schedule — whichever is lower. Always use conservative rent estimates.
Forgetting expenses is the second mistake. Every rental has property taxes, insurance, and maintenance costs. Self-managing investors often forget to include a management fee, but lenders typically include 8–10% regardless of whether you self-manage. Build in every expense to avoid surprises at underwriting.
Using the wrong debt service figure is another common issue. Some investors calculate DSCR using only principal and interest, while their lender uses the full PITIA. Clarify with your lender which method they use before assuming your ratio qualifies.
Enter your rental property numbers and instantly see your DSCR ratio and qualification tier.
Free DSCR Calculator →DSCR stands for Debt Service Coverage Ratio. It measures the relationship between a rental property’s net operating income and its mortgage payment. Lenders use it to determine whether a property generates enough cash flow to support a loan without relying on the borrower’s personal income.
A DSCR of 1.25 or higher is considered strong and qualifies for the best loan terms. A ratio of 1.0 means the property breaks even — income exactly covers the mortgage. Most DSCR lenders require a minimum of 1.0, though some programs accept ratios as low as 0.75 with higher down payments and rates.
Divide your monthly net operating income by your monthly mortgage payment. NOI equals gross rent minus operating expenses (taxes, insurance, HOA, management, maintenance, and vacancy). For example, if your NOI is $1,500 and your mortgage payment is $1,200, your DSCR is 1.25.
DSCR measures whether a property’s income covers its debt payment — it is a financing metric. Cap rate measures a property’s return relative to its total value regardless of financing — it is an investment metric. A property can have a great cap rate but a poor DSCR if it is heavily leveraged, and vice versa.
Yes. When calculating net operating income for DSCR, you should include a vacancy allowance (typically 5–8% of gross rent) and property management fees (8–10% of gross rent) even if you self-manage. Lenders expect these expenses to be accounted for in underwriting.
Operating expenses include property taxes, homeowners insurance, HOA or condo fees, property management fees, maintenance reserves, and vacancy allowance. These are subtracted from gross rent to get NOI. The mortgage payment (principal and interest) is the debt service — it is not included in operating expenses but rather is the denominator of the DSCR formula.
Yes, some lenders offer programs for DSCR ratios as low as 0.75. However, expect a larger down payment (25–30%), higher interest rates (1–2% above standard DSCR rates), stronger credit score requirements (often 700+), and cash reserves covering 6–12 months of payments. These deals can still make sense for appreciation plays or value-add strategies.