{"id":4957,"date":"2022-09-15T20:32:46","date_gmt":"2022-09-15T20:32:46","guid":{"rendered":"https:\/\/griffinfunding.com\/?p=4957"},"modified":"2026-03-22T15:19:20","modified_gmt":"2026-03-22T15:19:20","slug":"dscr-formula-and-calculation","status":"publish","type":"post","link":"https:\/\/griffinfunding.com\/blog\/dscr-loans\/dscr-formula-and-calculation\/","title":{"rendered":"DSCR Formula and Calculation"},"content":{"rendered":"

“No tax returns needed! No income verification! Use your rental income to finance your investment properties!”<\/span><\/p>\n

Have you seen ads promising easy funding from DSCR loans? In truth, there is nothing magical about the DSCR (debt-service coverage ratio). But it’s an important measure of the financial stability of a real estate investment project and your long-term ability to repay it.<\/span><\/p>\n

In this article, we will explain the DSCR formula and calculation and what you can do if your DSCR isn’t yet up to your lender’s standards. We will also answer some frequently asked questions about getting and using DSCR loans.<\/span><\/p>\n

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What is the debt service coverage ratio?<\/h2>\n

The debt-service coverage ratio is a single number that measures your readiness for <\/span>DSCR loans<\/span><\/a>. Your lender uses it for a quick look at whether you can service your current debt and any other debt they help you take on.<\/span><\/p>\n

The DSCR is a cash coverage ratio. It measures how many times you can payyour mortgage payment including principal,interest, taxes, and insurance (HOA if applicable) on your DSCR loan from your gross rental income. It tells the lender whether you have sufficient income to cover additional debt.<\/span><\/p>\n

Ideally, your DSCR needs to be greater than 1. A DSCR lower than 1 indicates that you won’t have the cash to service new debt. A DSCR of exactly 1 indicates that you are keeping up with your current obligations, but you aren’t able to take on any new debt with a cashout refinance.<\/span><\/p>\n

Most lenders look for a DSCR of at least 1.25<\/span><\/p>\n

Most lenders use a DSCR formula and calculation like this:<\/span><\/p>\n

Annual Rental Income \u00f7 Annual Mortgage Payments = DSCR, aka Debt Service Coverage Ratio<\/span><\/p>\n

A few commercial lenders use EBIT (earnings before interest and taxes) for their DSCR formula and calculation for both<\/span> commercial loans<\/span><\/a> and r<\/span>eal estate investment loans for LLCs<\/span><\/a>:<\/span><\/p>\n

Earnings Before Interest and Taxes (EBIT) \u00f7 Annual Debt Payments = DSCR<\/span><\/p>\n

Using EBIT to calculate your debt service coverage ratio gives you a higher number and a greater chance for getting a loan (something you may point out to a loan officer if you are told you are on the bubble for getting a loan).<\/span><\/p>\n

Where do you get the numbers to plug into the DSCR formula?<\/span><\/p>\n

For lending purposes, here’s how you come up with DSCR:<\/span><\/p>\n

Gross Revenue \/ Rent – Mortgage Payment(s) = DSCR<\/span><\/p>\n

If you use accounting software, your P & L (Profit and Loss) Statement will have a line item with this number.<\/span><\/p>\n

You will also need to know your total debt payment for the year. If you are using accounting software, you can find this number in your general ledger. But if you need to calculate your total debt payment manually, the formula is:<\/span><\/p>\n

Principal Payment + Interest Payment + Tax Payment + Insurance Payment = Total Debt Payment<\/span><\/p>\n

You don’t have to wait for a lender to do your DSCR calculation. You can calculate it yourself. This way, you will know whether you need to decrease expenses or increase your revenues to qualify for a DSCR loan. Let’s look at a few examples.<\/span><\/p>\n

Debt service coverage ratio example<\/h2>\n

Ready to calculate your DSCR?<\/span><\/p>\n

First, access your year-end income statement to find your gross rental income. To keep the math simple in this example, let’s say that your gross rental income was $120,000.<\/span><\/p>\n

Your next step is to calculate your annual debt service, the total mortgage debt you pay every year, including principal, interest, taxes, insurance and HOA (if applicable). Again, to keep the math simple, let’s suppose you have a $500,000 mortgage on your real estate property and no other debt. You make total piti mortgage payments of $5,000 a month<\/span><\/p>\n

Now, multiply your monthly debt service by 12 months to get your annual debt service:<\/span><\/p>\n

$5,000 X 12 = $60,000<\/span><\/p>\n

Next, divide your gross rental income by your annual debt service:<\/span><\/p>\n

$120,000 \u00f7 $60,000 = 2<\/span><\/p>\n

In this example, your DSCR is 2. Most lenders would consider this to be a very good number. The question, however, is what will your DSCR be after you get a new loan?<\/span><\/p>\n

In this example, let’s suppose you want to expand your building. The expansion will cost $500,000. Your lender will consider financing the entire cost of the expansion at 5% simple interest (interest only) with an APR of 5.843% on a 6 Month SOFR ARM DSCR loan. Again, to keep the math simple, let’s suppose your additional monthly payment would be $5,000.<\/span><\/p>\n

You currently have debt service of $60,000. If you get the loan, you will have additional debt service of<\/span><\/p>\n

$5,000 x 12 = $60,000<\/span><\/p>\n

Now, compute the new total annual debt service on your investment property.<\/span><\/p>\n

$60,000 + $60,000 = $120,000<\/span><\/p>\n

And compute your new DSCR.<\/span><\/p>\n

$120,000 \u00f7 $120,000 = 1<\/span><\/p>\n

Your computed DSCR tells your lender that you could just make your payments with breakeven cashflow..<\/span><\/p>\n

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What is a good DSC ratio?<\/h2>\n

The best way to describe a good DSC ratio is “it depends.”<\/span><\/p>\n

A DSC ratio of 1.25 to 1.50 (after the new loan is added in) tells your lender that you are a good risk. You have a cash cushion that you can use to be sure you make all your payments. How close to 1.25 or 1.50 the lender is willing to go depends on several factors:<\/span><\/p>\n