The DSCR formula
DSCR = Net Operating Income / Annual Debt Service
Both numbers are annual figures. NOI is gross rental income minus operating expenses (management, repairs, taxes, insurance, vacancy allowance) but BEFORE mortgage payments and depreciation. Debt service is the 12 monthly principal-and-interest payments on the loan, not including tax or insurance escrow (those are already captured in NOI).
If your monthly rent times 12 is more than your monthly PITI times 12 after 20% for expenses, you are probably at a 1.25 DSCR. A property renting for $2,000/month with a $1,300 PITI is roughly $24,000 rent, $4,800 opex, $19,200 NOI, and if PI is $1,050/month that is $12,600 debt service, producing a DSCR around 1.52.
A worked example with real numbers
A single-family rental in Indianapolis purchased for $180,000 at 7.25% with 20% down. The investor gets a DSCR loan for $144,000 on a 30-year amortization.
| Line | Amount | Notes |
|---|---|---|
| Gross annual rent | $21,600 | $1,800/month market rent |
| Vacancy (5%) | ($1,080) | Lender standard assumption |
| Property management (8%) | ($1,728) | Local PM standard |
| Property taxes | ($2,340) | 1.3% of purchase price |
| Insurance | ($1,440) | Investor landlord policy |
| Repairs and maintenance (7%) | ($1,512) | Lender standard for C-class properties |
| NOI | $13,500 | Before debt service |
| Annual debt service (P&I) | $11,790 | $982/month at 7.25% on $144K |
| DSCR | 1.15 | $13,500 / $11,790 |
A DSCR of 1.15 fails most standard DSCR programs (1.20 or 1.25 minimum). This investor has three options: put more money down to reduce the loan amount, buy the rate down, or negotiate the purchase price lower. Dropping the loan to $135,000 reduces annual debt service to ~$11,050 and pushes DSCR to 1.22 — which qualifies.
DSCR thresholds by lender type
| Lender Type | Typical Min DSCR | Rate Premium | Max LTV |
|---|---|---|---|
| Agency conventional investment loan | N/A (uses DTI) | ~0.25%-0.75% vs. owner-occupied | 75-80% |
| Standard DSCR lender | 1.20 to 1.25 | ~0.75%-1.25% vs. conventional | 75-80% |
| DSCR lender (1.00-1.19 tier) | 1.00 | +0.25%-0.50% | 70-75% |
| No-ratio DSCR (below 1.00) | None | +0.50%-1.25% | 65-70% |
| Portfolio/bank commercial loan | 1.20 to 1.30 | Varies (often adjustable) | 70-75% |
Rate premiums are indicative and move with the broader bond market. The DSCR tier structure is relative: when 30-year fixed conventional is at 6.75%, a 1.25 DSCR loan might be 7.75% and a no-ratio loan might be 8.50%. What matters is the delta between tiers, which stays fairly stable across rate environments.
How to calculate DSCR step by step
Gather gross rental income
Use in-place rent for stabilized properties. For properties you are acquiring or repositioning, use the lender's required rent schedule (Form 1007 or equivalent appraisal add-on). Do not project above-market rent hoping the lender will accept it.
Apply standard operating expense assumptions
Lenders use standardized expense ratios even if your actual numbers are lower: vacancy 5%, property management 8-10%, repairs 7-10%, plus actual taxes and insurance. They will not underwrite off your claim of "zero vacancy in three years" because the appraiser cannot verify it.
Calculate NOI
Gross rent minus vacancy minus all operating expenses. NOI does NOT subtract mortgage principal, interest, depreciation, or capital expenditures. It is the operating income before financing decisions.
Calculate annual debt service
Monthly P&I × 12. Do not include escrow, HOA, or taxes (those are already in NOI as expenses). Use the fully amortized payment at the rate and term the lender quotes, not a teaser or interest-only payment.
Divide to get DSCR
NOI / Annual Debt Service. Round to two decimals. 1.25 and above is strong; 1.20 to 1.24 is acceptable; 1.00 to 1.19 needs a specialty product; below 1.00 is no-ratio territory.
DSCR vs DTI: why investors care
Debt-to-income (DTI) is the traditional mortgage qualifier. It compares YOUR personal income against YOUR personal debts, including all mortgages, car loans, student loans, and credit cards. Conventional lenders cap DTI at around 43% to 50% depending on the loan program. For investors with multiple rental properties, DTI becomes the bottleneck: every new mortgage adds to the numerator while rental income often only gets 75% credit toward your income (and only if you have two years of Schedule E history).
DSCR skips DTI entirely. The property qualifies itself based on its own rental income and its own debt service. Your W-2 salary does not matter. Your existing portfolio does not matter. You can title the loan in an LLC and use your entity's tax return (or not). This is why DSCR loans are standard for investors who have outgrown the conventional 10-mortgage limit, self-employed borrowers with hard-to-document income, and buyers who want LLC asset protection from day one.
How to improve a weak DSCR
Common DSCR mistakes
When DSCR does not matter
Three scenarios where DSCR is not the binding constraint:
- Short-term rentals where projected Airbnb revenue is uncertain. Many lenders will not underwrite STR revenue at all; they use the long-term rental equivalent. You may need a no-ratio product or a lender specializing in STR DSCR (AirDNA-backed).
- Cash purchases or all-equity refinances where the property is unlevered. No debt means no debt service; DSCR is undefined.
- Commercial multifamily (5+ units). Commercial DSCR lenders use the same math but different thresholds (typically 1.20 to 1.35) and will often require 25-30% down regardless of DSCR strength.
How DoorVault tracks DSCR across your portfolio
DoorVault calculates DSCR in real-time for every property as your income and expenses flow in, so you always know which properties qualify for refinance and which ones need work before you apply.