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As a real estate investor, understanding your Debt Service Coverage Ratio (DSCR) is crucial to securing financing for your properties. The DSCR is a key metric that lenders use to determine your ability to repay a loan based on the income generated by your investment property. In this guide, we'll explore what DSCR is, how to calculate it, and why it's important for your real estate investments.

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What Is DSCR?

Debt Service Coverage Ratio (DSCR) is a financial ratio that measures a property's ability to cover its debt obligations with its net operating income (NOI). In simple terms, DSCR compares the income generated by a property to the mortgage payments that need to be made.

Why DSCR Matters for Investors

For real estate investors, DSCR is a vital metric because it determines loan eligibility. Unlike traditional loans that rely heavily on personal income, DSCR loans focus on the cash flow of the property itself. This makes them ideal for investors who might have lower taxable income or because they invest through an entity (LLC, Corp, Partnership, etc.).

Lenders use DSCR to ensure that the property generates enough income to cover the loan payments, making it a safer investment for them. A higher DSCR indicates a stronger ability to repay the loan, which can lead to better loan terms and lower interest rates.

How to Use The DSCR Calculator

Calculating your DSCR is easier than you might think, especially with our DSCR calculator at your disposal. Here’s a step-by-step guide to help you use the calculator correctly:

1. Enter the Purchase Price or Fair Market Value. Start by entering the value of the property you're looking to finance. This is the first piece of information needed to assess your DSCR.
2. Enter the Interest Rate. The interest rate on your loan will vary based on factors such as your credit score and the Loan-To-Value ratio. As a default in the calculator, we provide the average DSCR Rate based the average rate of the DSCR loans we’ve originated on U.S. investment properties in the previous month.
3. Enter The LTV% of the Loan. For Ridge Street’s DSCR loans, the LTV% is capped at 80% of the market value. Your total loan amount is critical in determining your DSCR.
4. Review Loan Payment. The DSCR calculator will calculate your monthly loan payment based on the information provided. This payment will be compared to your net operating income to determine your DSCR.
5. Enter Estimated Taxes, Insurance, and HOA Fees. Input any estimated property taxes and Homeowners Association (HOA) fees, as these will impact your property's net income. Include any expected insurance costs, as they are part of the operating expenses that affect your DSCR.
6. Enter Gross Monthly Rental Income. Finally, enter the gross monthly rental income you expect to earn from the property. This should include the total rent payments you anticipate receiving from tenants every month. If you are calculating the DSCR for a multi-unit property, make sure to enter the sum of all monthly rents.
7. Review Your DSCR. Once all the necessary information is entered, the DSCR calculator will provide you with a decimal figure that represents your DSCR. This number is what lenders will use to determine your eligibility for a loan. Your DSCR should have a minimum value of 1.0.

What DSCR Do You Need to Qualify for a Loan?

A DSCR of 1.0 means that your property generates enough income to cover the loan payments. This is the minimum required DSCR for Ridge Street to provide a loan. With a DSCR of 1.0 or greater, the monthly rent you collect will cover the monthly loan payment plus the costs of insurance, taxes, and home owner’s association fees.

Improving Your DSCR

If your DSCR is below 1.0, there are several strategies you can use to improve it:

1. Increase Your Down Payment. By Increasing your down payment your loan amount will decrease and your DSCR will increase. If you’re struggling to improve your DSCR past 1.0, increasing your down payment is an option you may have to consider.
2. Ask About a Rate Buydown. Ridge Street Capital allows you to pay an additional fee at closing in exchange for a lower rate. In some cases, a rate buydown will allow you lower your DSCR without increasing your overall cash required to close.
3. Lower Insurance Costs. Ask your insurance broker if there is anything they can do to lower your policy fee. A lower insurance policy fee will increase your DSCR.
4. Explore an ARM vs.. A 30 YR FRM. Most DSCR loans for investment properties are 30 YR Fixed Rate Mortgages (FRM). Adjustable rate mortgages offer a 5 year fixed term with an adjustable rate after the initial 5 year term, have lower interest rates than 30 Year FRM. Ridge Street Capital is one of few investment property lenders that offer ARM’s to investor clients to help lower the DSCR on rental properties.

DSCR Formula

The Debt Service Coverage Ratio (DSCR) is calculated by dividing the monthly rent a.k.a. the net operating income (NOI) of the property by the monthly loan payment (principal + Interest), taxes, insurance and association fees (PITIA).

DSCR = Rent/PITIA

Getting a DSCR Loan With Ridge Street Capital

Ridge Street Capital is an investment property lender that finances fix and flips and rental properties in 35 States. For all of our DSCR loans, we guarantee:

• Competitive Pricing. Our DSCR loans are priced in the top 5% of the market.
• Simple Process. DSCR loans take 14-28 days to close with no personal income documentation required.

To get funding on an active project you can submit our 2 Min Quick App and we’ll send you Term Sheet for your loan.

If you’re simply looking to get pre-approved so that you can find your next deal, you can submit our 2 Min Pre-Approval App and we’ll send you a Pre-Approval Letter.

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