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Lina Reeves
Lina Reeves

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DSCR Formula Explained: Why Your Lender Gets a Different Number

#realestate #investing #finance #tools

DSCR (Debt Service Coverage Ratio) is the metric that decides whether your DSCR loan gets approved. Most investors calculate it wrong — and find out when the lender denies them.

The Formula 

DSCR = Gross Monthly Rent / Monthly PITIA
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Where PITIA = Principal + Interest + Taxes + Insurance + Association (HOA)

The Catch: Your Numbers vs. Lender Numbers

Investors use:

  • Actual lease rent (what the tenant pays)
  • Actual insurance premium (their policy)
  • Property tax from county records

Lenders use:

  • Appraised market rent (lower of lease or appraisal)
  • Insurance at replacement cost (often higher)
  • Annualized taxes (may differ from current bill) 
# Investor's calculation
investor_rent = 1350
investor_pitia = 1030
investor_dscr = investor_rent / investor_pitia
print(f"Investor DSCR: {investor_dscr:.2f}")
# Investor DSCR: 1.31

# Lender's calculation
lender_rent = 1250  # appraised, not actual
lender_pitia = 1060  # higher insurance estimate
lender_dscr = lender_rent / lender_pitia
print(f"Lender DSCR: {lender_dscr:.2f}")
# Lender DSCR: 1.18

print(f"Gap: {investor_dscr - lender_dscr:.2f}")
# Gap: 0.13
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A 0.13 gap. That is the difference between approved and denied at most lenders (minimum 1.25).

How to Fix a Low DSCR

There are only 3 variables: rent (up), PITIA (down), or down payment (up).

def calc_dscr(rent, loan_amount, rate, years, monthly_tax, monthly_ins, hoa=0):
    r = rate / 100 / 12
    n = years * 12
    pi = loan_amount * (r * (1+r)**n) / ((1+r)**n - 1)
    pitia = pi + monthly_tax + monthly_ins + hoa
    return rent / pitia, pitia

# Original: 25% down
price = 165000
loan = price * 0.75
dscr, pitia = calc_dscr(1300, loan, 7.5, 30, 225, 165)
print(f"25% down: DSCR = {dscr:.2f} (PITIA ${pitia:,.0f})")

# Fix: 30% down
loan_30 = price * 0.70
dscr_30, pitia_30 = calc_dscr(1300, loan_30, 7.5, 30, 225, 165)
print(f"30% down: DSCR = {dscr_30:.2f} (PITIA ${pitia_30:,.0f})")

print(f"Extra 5% down = extra ${price * 0.05:,.0f} cash")
print(f"DSCR improvement: +{dscr_30 - dscr:.2f}")
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DSCR Tiers by Lender

DSCR Lender Response Typical Rate Impact
1.50+ Best terms, lowest rate Base rate
1.25-1.49 Standard approval +0.0-0.25%
1.10-1.24 Possible with compensating factors +0.25-0.75%
1.00-1.09 Few lenders, higher rate +0.75-1.5%
Below 1.0 Most lenders decline N/A

Bottom Line

Always calculate DSCR using the lender's assumptions, not yours:

  • Use appraised rent (10-15% below actual lease is common)
  • Use replacement-cost insurance (15-20% above your actual policy)
  • Budget for a 0.10-0.15 gap between your DSCR and the lender's

Calculate your DSCR before applying:
https://arvcalc.com/dscr-calculator

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