Before some lenders will write a loan on a rental, they check whether the rent can carry it. The check is a ratio called DSCR, and it looks like simple division: what the house brings in, over what the loan costs. The catch is that lenders don’t all put the same things on each side.
What is DSCR on a rental property?
DSCR, short for debt service coverage ratio, is how many times a property’s income covers its loan payments. Debt service means those payments: principal and interest.
At 1.00, the income covers the payments exactly, and below 1.00 it falls short. At 1.25, it covers them with 25% to spare. Loans sized on the property’s income instead of your pay are often called DSCR loans.
How do you calculate DSCR?
You divide a year of income by a year of loan payments, and the lender decides what counts as each. Take the house the rental calculator opens with: $250,000, bought with 20% down on a 30-year loan at 7%, the example’s rate. It rents for $2,750 a month. Property taxes are $3,000 a year, insurance is $1,400, and there are no association dues. The example sets aside 5% of the rent for empty months, 10% for repairs and big repairs, and 8% for a property manager.
A lender can measure it two ways:
- NOI over loan payments. Net operating income, or NOI, is the rent less empty months and every running cost, before the mortgage. It’s divided by a year of principal and interest.
- Rent over full payment. The rent is divided by the full payment: principal, interest, property taxes, insurance and any association dues.
| NOI over loan payments | Rent over full payment | |
|---|---|---|
| Rent | $33,000 | $33,000 |
| Empty months (5% of rent) | −$1,650 | – |
| Property taxes | −$3,000 | – |
| Insurance | −$1,400 | – |
| Repairs and big repairs (10% of rent) | −$3,300 | – |
| Property management (8% of rent) | −$2,640 | – |
| Income it counts | $21,010 | $33,000 |
These are example figures, not a forecast for any market.
| NOI over loan payments | Rent over full payment | |
|---|---|---|
| Principal and interest on $200,000 | $15,967 | $15,967 |
| Property taxes | – | $3,000 |
| Insurance | – | $1,400 |
| Payments it counts | $15,967 | $20,367 |
Divide each column’s income by its payments. On the first formula, $21,010 over $15,967 is 1.32. On the second, $33,000 over $20,367 is 1.62.
Taxes and insurance appear in both, on opposite sides. The gap is what the second formula leaves out: $7,590 a year of empty months, repairs and management, which the house still costs.
The first number also tells you the cash flow. Anything above 1.00 is left after the loan: $21,010 less $15,967 is $5,043 a year, the $420 a month this house keeps in this line-by-line cash flow. The second number can’t do that, because it hasn’t paid for the empty months, the repairs or the manager.
Which DSCR formula do lenders use?
Lenders don’t all use the same formula, so a DSCR means little until you know which one produced it. Ask each lender which formula it uses, which rent it plugs in, and what minimum it wants.
Under Regulation Z, the federal Truth in Lending rule, a loan to buy, improve or maintain a rental you won’t live in counts as business credit: it “is deemed to be for business purposes” (CFPB). If you expect to stay there more than 14 days in the coming year, that rule doesn’t apply.
What is a good DSCR for a rental property?
To a lender, a good DSCR is one at or above its minimum, and each lender sets its own. The same 1.25 is a much lower bar on the second formula, as the next section shows.
The rental calculator uses the first formula and draws its line at 1.25. Its “Debt coverage (DSCR)” figure shows in green at 1.25 or more and in red below 1.00, with a warning color in between. Its top verdict, “This deal works,” needs at least 1.25, positive cash flow and a cash-on-cash return of 8% or more. Between 1.00 and 1.25, the best it will say is “Cutting it close.” Below 1.00, the rent no longer covers the loan after costs, and the verdict is “This deal doesn’t work.”
Under five units, there’s no box for a lender’s minimum. Choose Multifamily and put five or more in “Units in the building,” and a “Lender’s minimum coverage” box appears under Financing, set to 1.25. Change it to a lender’s figure. When the income doesn’t cover the loan that many times, the answer says how much less the lender would lend.
When does this house fall below 1.25?
On the first formula, this house falls below 1.25 when the rent drops under about $2,636, $114 less than the example’s. At $2,750 rent, it happens once the rate passes about 7.52%. On the second formula, the rent can fall as far as $2,122 before that happens.
| NOI over loan payments | Rent over full payment | |
|---|---|---|
| At $2,750 rent and 7% | 1.32 | 1.62 |
| At $2,750 rent and 7.75% | 1.22 | 1.53 |
| Rent where it falls below 1.25, at 7% | about $2,636 | about $2,122 |
| Rate where it falls below 1.25, at $2,750 rent | about 7.52% | about 10.5% |
On this house, the verdict moves before the DSCR does. Below about $2,702 in rent, cash-on-cash falls under 8% and the answer turns to “Cutting it close” while the DSCR still reads 1.29.
The low end of the second column is the trap. At $2,122 a month, the house still scores 1.25 on that formula, but the rental calculator shows it losing $63 a month once empty months, repairs and management are paid. Its DSCR on the first formula is 0.95, and the verdict is “This deal doesn’t work.” Passing a lender’s test doesn’t mean the house pays for itself.
The example’s 7% is close to the 7.03% average in Freddie Mac’s weekly survey for September 24, 2026, which covers purchase loans on one-unit homes their owners live in (Freddie Mac). How interest rates affect a rental property takes the same house through each quarter point.
How do you check a rental’s DSCR before you make an offer?
Work out both numbers yourself, then match them to the lender’s rule.
- Run the house in the rental calculator with the county’s tax rate, an insurance quote and a lender’s rate. Its “Debt coverage (DSCR)” figure is the first formula.
- Work out the second formula by hand: the monthly rent divided by principal, interest, taxes, insurance and any association dues.
- Ask each lender which one it uses and what its minimum is, and compare the matching figure.
- Read the cash flow as well. A house can clear a lender’s minimum and still cost you money each month, as this one does at $2,122.
To see a lender’s minimum cut a loan rather than grade it, read what a 1.25 DSCR did to this BRRRR refinance.