If you are planning to use a DSCR loan to buy a rental, being able to run the ratio yourself before you apply tells you exactly where you stand. This number largely determines whether you get approved and how much you can borrow. The good news is the formula is simple.
The basic formula
DSCR = Monthly rental income ÷ Total monthly debt payment
The debt payment is often abbreviated PITIA, which includes:
- Principal
- Interest
- Taxes (property taxes)
- Insurance
- Association dues (HOA, if any)
A worked example
Say you are buying a rental with these numbers:
- Market rent: $2,400/month
- Principal + interest: $1,500/month
- Property taxes: $300/month
- Insurance: $120/month
- HOA dues: $80/month
Total debt payment = $1,500 + $300 + $120 + $80 = $2,000/month.
DSCR = $2,400 ÷ $2,000 = 1.20.
A 1.20 means the property generates 20% more cash flow than it needs to cover the loan — a ratio many lenders consider healthy.
What number do lenders want to see?
Thresholds vary by lender, but generally:
- 1.25 and above: strong, usually the most favorable terms
- 1.0 to 1.24: workable, the property covers itself
- Below 1.0: the property does not cover the loan on its own; some programs still allow it but typically ask for a larger down payment or a higher rate
What about DSCR for a short-term rental?
With an Airbnb or short-term rental, income is not as steady as a long-term lease — there are peak and slow seasons. Lenders often use average revenue over 12 months (from operating history or market data for the area) and then subtract vacancy and operating expenses before running the formula. So the DSCR used for underwriting may be lower than the gross revenue you see on your dashboard.
One important note: qualifying for a loan does not mean you are allowed to operate a short-term rental locally. Rules vary by city and county — check carefully before you build your math around Airbnb revenue.
A few ways to improve your DSCR
- Put more down to lower the principal and interest payment
- Choose a property in an area with a better rent-to-price ratio
- Buy a property with no HOA, or low dues
- Compare different loan structures to find the most efficient payment
Calculating DSCR takes only a few minutes, but understanding what the number reflects is what actually helps you decide. If you would like to run the numbers together for a specific property, William Trinh (NMLS 2837392) is happy to talk at no cost and help you estimate DSCR before you make an offer.