Debt Service Coverage Ratio Calculator (DSCR)

Q: What is a 1.50 DSCR?

A 1.50 DSCR means that the income from your property will be able to cover the total debt service related to your property and have enough left over for an income for you. 1 exactly represents the amount needed to cover the loan, while 0.50 represents the amount that is left over.

Q: What is a good DSCR coverage ratio?

A good DSCR coverage ratio is 1.25 . This number is ideal because lending institutions typically want to see that you are in a good position to repay your loan and still meet any additional obligations that may come up.

Creators

Bogna Szyk and Tibor Pál, PhD candidate

Tibor Pál

PhD candidate

Tibor is a Ph.D. candidate in Statistics at the University of Salerno, focusing on time series models applied in macroeconomics and finance. His work is greatly motivated by the perception that risk, uncertainty, and unexpected events are inherent driving features of everyone's lives; thus, attitude towards these aspects is essential to one's life and economics. Hence, his primary interest is developing novel statistical approaches to capture unordinary episodes in economic activity and irregularities in the financial market driven by risk-related behaviors. Translating these elements into his life makes him keen to discover and live in unusual places where he can always bring some unique features into his daily life. He likes gastronomy, nature, and mountains, so traveling, cooking, and hiking are his favorite activities in his free time. See full profile

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Małgorzata Koperska, MD and Adena Benn

Adena Benn

Website

Adena Benn is a Guyanese teacher with a degree in computer science who is always reading and learning. She loves problem-solving, everything tech, and working with teenagers. She has a passion for education and is especially interested in how children learn and the teaching methods that best suit their learning styles. She grew up on a farm in Pomeroon, Guyana, where she worked alongside her parents and siblings. As such, she is just as comfortable growing plants as teaching in the classroom. In her early life, she also gained expertise as a seamstress, which she learned from her mother. By grade 9, she had already acquired her dressmaker's certificate. Today she uses her skills to design many items for her family. In her free time, Adena loves to read, take long walks, write children’s stories and poetry, travel, or spend time with her family. See full profile

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This debt service coverage ratio calculator, or DSCR calculator for short, measures whether your incoming cash flows are sufficient to pay back a debt. Commercial lenders most commonly use it to determine if, thanks to this loan, the borrower will be able to generate an adequate return on investment.

You can start using this debt service coverage ratio calculator straightaway or read on for a more thorough explanation of how to calculate DSCR and how to interpret the result.

Besides, you may use the DSCR calculator with our Cap Rate Calculator to support your investment decisions in the real estate market.

What does DSCR stand for?

DSCR stands for debt service coverage ratio. It is a metric commonly used in commercial lending (instead of personal credit scoring) to establish whether the borrower's investment makes sense from an economic point of view.

In contrast to private purchases, commercial mortgages are taken with one main objective: generating income. For example, as a real estate agent, you might consider buying a building to rent out the apartments. The rent paid by the tenants will have to cover the loan you've taken (with interest) and provide you with some profit. Your lender won't be interested in your credit history: he will be interested in predicted cash flows to ensure that you won't run out of money to pay him off.

How to calculate DSCR

Our debt service coverage ratio calculator uses the following formula:

\footnotesize \text{DSCR} = \frac{\text{NOI}}{\text{debt service}}

where:

$\rm DSCR$ — Debt service coverage ratio;
$\rm NOI$ — Monthly net operating income; and
$\rm debt\ service$ — Monthly payment towards paying off your debts.

You can input the value of NOI directly in this DSCR calculator or head to our net effective rent calculator for a more detailed calculation scheme.

Alternatively, you can open the NOI calculation section of the calculator to calculate the NOI according to the equation:

\footnotesize \! \rm NOI = (1 - expenses)(1 - vacancy)GI

In this formula:

$\rm GI$ — Gross income — the monthly rent paid by your tenants;
$\rm expenses$ — Monthly expenses for maintenance, repairs, or cleaning, expressed as a percentage of the gross income; and
$\rm vacancy$ — Vacancy rate (how often you don't have a tenant for the apartment), expressed as a percentage of the gross income.

Our debt service coverage ratio lets you easily determine your debt service, too!

Minimum acceptable DSCR

Your lender will probably use the DSCR to decide whether you should get the loan or not. The common minimum acceptable DSCR is 1.25; if you're below this value, you will probably be rejected as a potential borrower. On the other hand, if your DSCR is substantially higher, you might get your loan faster than you'd expect!

Finally, there are other debt-analysis-related tools, such as the debt to capital ratio calculator and interest coverage ratio calculator, on which you can rely for further understanding of the funding structure of your company.

FAQs

How do I calculate a DSCR loan?

Follow these steps to calculate for your DSCR loan:

Get your net operating income (NOI) from the property. Let's say its $5000.
Calculate your total debt service (expenses). For example:
- Mortgage = $2,500
- Maintainance = $200
- Insurance = $50
Total debt service = $2,750
Apply the DSCR formula:

DSCR ratio = ^NOI/_{total debt service}
Substitute the values and calculate:

DSCR = ⁵⁰⁰⁰/₂₇₅₀
DSCR = 1.82

To qualify for a DSCR loan, most lending institutions require a DSCR of 1.25 or greater.

What is a 1.50 DSCR?

A 1.50 DSCR means that the income from your property will be able to cover the total debt service related to your property and have enough left over for an income for you.

1 exactly represents the amount needed to cover the loan, while 0.50 represents the amount that is left over.

How much do I need to put down on a DSCR loan?

The amount needed as a down payment for a DSCR loan varies. DSCR loans typically require a higher downpayment than a typical mortgage. The down payment is usually 20% and above. The lower the downpayment is on a DSCR loan, the higher the monthly payments will be.

What is a good DSCR coverage ratio?

A good DSCR coverage ratio is 1.25.

This number is ideal because lending institutions typically want to see that you are in a good position to repay your loan and still meet any additional obligations that may come up.