DSCR Calculator: 2 Main Methods to Calculate DSCR

The entire US real estate market has an estimated value of more than $33 trillion. Rental properties account for around 36% of that value, or roughly $11 trillion. We can all agree that’s a lot of money,  which is exactly the reason why many investors (both domestic and foreign) choose to purchase US-based properties. Which is why you’ll need to learn how DSCR calculator works.

One of the best ways to buy property in the US is via financing options, or more specifically mortgage loans. And, one of the most popular alternative types of loans are DSCR loans. These cash flow loans are primarily intended for resident investors and can only be used to purchase rental properties.

But, before you can get approved for one, you first need to calculate the DSCR of the property you’re interested in. Why? Because lenders use the DSCR score to decide if they want to approve a specific loan or not.

What Does DSCR Mean?

DSCR or Debt Service Coverage Ratio is a metric used by lenders to determine the borrower’s ability to repay their debt. It also aims to show the financial health of a particular property and determine if it’s viable for investment or not.

When a DSCR is 1, it shows the lenders that the particular rental property is able to generate enough income to only cover the debt service. On the other hand, when a DSCR is higher than 1, it shows that the property is able to generate more income than is needed to repay the loan, which in turn lowers the risk for lenders.

The higher the DSCR is, the less likely it is that the borrower will default on their loan, and, the less risky the investment will be for the lenders.

We can help you get in touch with lenders.

DSCR Calculator — 2 Methods

Different lenders will use different ways to calculate the DSCR of a particular property. In the following part of the article, we’ll go through the most popular ways to do just that. But, before we continue, we need to agree on some numbers up front (so we can actually calculate the DSCR).

Let’s say that:

• Property value is $250,000
• Monthly Rental Income is $3300;
• Monthly Operating Expenses are $1500 ;

1. DSCR Calculator: Using NOI

NOI or Net Operating Income is a metric that most lenders use to calculate DSCR. The formula goes as follows:

DSCR = NOI / Debt Service

Now, to determine NOI you need to deduct all the operating expenses from the income that your property generates. The formula for that is:

Net Operating Income = Monthly Rental Income – Operating Expenses

In our case, the monthly rental income is $3300. Operating expenses are $1500 and they include:

1. Property Tax $300
2. Property Insurance $200
3. Repairs and maintenance $350
4. Property management $350
5. Vacancy Rate 10% $300

With those numbers in mind, we get that:

NOI = $3300 – $1500 = $1800

To get the yearly NOI all we have to do is multiply the above results with the number of months in a year.

NOI = $1800 x 12 = $21,600

Now that we have our NOI, and before we move on, we have to first calculate the Debt Service (or DS). Remember, we went with a property that’s worth $250,000. In addition to that, let’s assume that the downpayment is 20% (which it will be in most cases) and that the interest rate is set at 8% (or 0,08 when written down as a numeral). This will make the loan principal $200,000 (or $250,000 minus the $50,000 for the downpayment).

To calculate the DS we first need to determine the monthly loan payment. We can do that by using the formula in which:

• P represents the monthly loan payment
• a represents the  loan principal
• r represents the loan interest rate
• n represents  the number of payments each year (12)

P = a (r / n)

P = 200,000 (0,08 / 12) = 1333

Now, all that’s left to do in order to calculate DS is to multiply the monthly loan payment by 12.

Debt Service = 1333 x 12 = 15,996

Finally, we have all the numbers, and all that we need to do now is to input them back into the original DSCR calculation formula.

 DSCR = NOI / Debt Service

DSCR = 21,600 / 15,996 = 1,35

The DSCR for our property is 1,35. Most lenders consider anything above 1 to be good, and anything above 1,25 to be great.

2. DSCR Calculator: Using GI

The other method for calculating DSCR is to use Gross Income (GI) instead of NOI. We should mention that using GI is less accurate. The lenders who use GI are looking to approve more loans, and are willing to accept riskier clients, but will in turn usually ask for a larger down payment (above the usual 20-25%).

The GI in the case of a rental property is actually just the Monthly Rental Income, which in our particular case is $3300. It doesn’t take into account any expenses and it leads to a much higher DSCR ratio (than the calculation that uses NOI).

In our case, and with the numbers we’ve mentioned, that would look something like this:

GI = Monthly Rental Income x 12 = 39,600

 DSCR = GI / Debt Service

DSCR = 39,600 / 15,996 = 2,47

So, when using GI instead of NOI, we got a DSCR of 2,47. This is really high, but, without taking into account the expenses, it can not be considered completely accurate. For those reasons, most lenders will tend to go with the DSCR calculation that includes NOI.

FAQ

What are DSCR loan interest rates?

DSCR loan interest rates are paid on top of the loan principal and are usually a bit higher than regular interest rates. The formula to calculate them is:

DSCR Loan Interest Rate = 5 Year US Treasury + Borrower Credit Spread

How to qualify for DSCR loans?

Most lenders will have specific requirements that borrowers need to fulfill before they get approved for a DSCR loan. Those requirements will more than likely include:

• DSCR of 1 or higher;
• Downpayment of 20-25%;
• Property appraisal and 1007 Rent Schedule Form;
• Minimum credit score of 620;
• A certain amount of cash reserves or other assets;

What DSCR do I need to qualify for a loan?

Most lenders will look for a DSCR ratio of at least 1, before approving your loan. The DSCR ratio of 1,25 is considered an average benchmark and is what most lenders will be looking for. But, we should also mention that some lenders will approve a loan, even if the DSCR is below 1.  In those situations, lenders will most likely be focusing on other factors that can qualify a borrower for this type of loan, such as the borrower’s assets, cash reserves, credit score, and others.