How the ratio is calculated
On a residential rental, the debt service coverage ratio is the monthly rent divided by the full monthly payment: principal, interest, property taxes, insurance and any association dues. At 1.00 the rent covers the payment exactly. Above 1.00 the property has a margin. Below 1.00 the shortfall comes from you.
The calculator also works the ratio backwards. It takes the rent, subtracts the taxes, insurance and dues, and finds the largest loan whose principal and interest still fit at a ratio of 1.00 and at 1.25. The smaller of that figure and the leverage cap is the loan a property can carry. Our post on how DSCR is calculated goes through each line, including why commercial loans use net operating income instead.
A worked example
A rental worth $700,000 rents for $4,800 a month. Taxes are $9,600 a year and insurance $2,400, so $1,000 a month goes to escrow before the loan. A $500,000 loan at 7.50% on a 30 year fixed term costs $3,496 a month in principal and interest, which makes a full payment of $4,496.
The ratio is 1.07: the rent covers the payment with $304 to spare each month. The same rent would carry a loan of up to $543,467 at a ratio of 1.00, or $406,170 at 1.25. At 71.4% of the value, the loan is also inside our published 80% LTV limit.
How to raise a ratio that falls short
- Borrow less. A smaller loan is a smaller payment. It is how most shortfalls are solved.
- Take the longer term. A 40 year fixed payment is lower than a 30 year payment on the same loan. Switch the term above and watch the ratio move.
- Get the real costs. On a purchase, the tax is based on your price, and insurance quotes vary widely. Use real figures, not the listing's.
- Document the rent properly. A signed lease at market, or a market rent analysis on a vacant property. Short term rental income is permitted on our rental DSCR loan with documentation.
Our post on DSCR loan requirements lists everything else a lender checks, and DSCR loans explained covers who the loan fits and how it compares with a conventional loan.
Our rental loan terms
Our rental property loans publish rates from 6.50% to 9.99% on the Non-QM tier, up to 80% LTV, 5, 7, 30 and 40 year fixed terms and a 620 minimum credit score. The rental DSCR loan covers single family homes, condos, townhomes and 2 to 4 units and accepts first time investors; the rental portfolio and multifamily term products require landlord experience. For a purchase or a renovation before the rental loan, the hard money loan calculator totals the short-term cost.
Send us the property, the rent and the loan you need and we will tell you where the ratio and the leverage land. Start a loan request or call (619) 617-2797.