The Debt Service Coverage Ratio (DSCR) is one of the most important metrics used by lenders to evaluate whether a rental property generates enough income to cover its debt obligations. If you’re applying for a DSCR loan, understanding how this ratio works and how to calculate it, can help you determine whether your property qualifies for financing.

What Is DSCR?

DSCR measures a property’s ability to cover its monthly loan payments using its income. It compares the net operating income (NOI) from the property to the total debt service, which includes the principal, interest, taxes, and insurance (PITI) on the loan.

A DSCR of 1.00 means the property’s income exactly covers the loan payments. Most DSCR lenders prefer a ratio of 1.20 or higher for optimal loan terms.

DSCR Formula

DSCR = Net Operating Income (NOI) / Total Debt Service (PITI)

  • Net Operating Income (NOI): This is the rental income after operating expenses but before mortgage payments.
  • Total Debt Service (PITI): This is your full monthly mortgage payment, including principal, interest, taxes, and insurance.

Example of How To Calculate DSCR

You own a rental property that brings in $2,500/month in gross rent. Your monthly expenses (excluding the mortgage) are $500, leaving an NOI of $2,000. Your estimated mortgage payment (PITI) is $1,600/month.

DSCR =1,600 \ 2,000​ = 1.25

A DSCR of 1.25 indicates that your property generates 25% more income than needed to cover the loan payment, which would generally qualify you for a DSCR-based loan.

Why DSCR Matters to Lenders

Lenders use DSCR to assess risk. A higher DSCR means a lower risk of default. A ratio below 1.00 signals that the property doesn’t earn enough to cover its debt, which makes financing more difficult.

Typical lender expectations:

  • 1.25+: Strong coverage, easier approval 
  • 1.00 – 1.24: Acceptable, but may come with tighter terms 
  • Below 1.00: Risky; may not qualify without other compensating factors

If you’re considering a DSCR loan to finance or refinance a rental property in the Houston, Texas area, calculating your DSCR upfront can give you a clear picture of where you stand. It’s a simple, powerful metric that can shape your loan terms and eligibility.

Need help running the numbers or finding the right loan? Contact LJC Financial, we specialize in DSCR-based rental loans to help investors in the Houston, Texas area grow their portfolios with less red tape and more flexibility.