What’s A DSCR Anyway?

If you hang around real estate investing long enough, you’re likely to hear the acronym DSCR.

So what does it mean, anyway?

DSCR is short for Debt Service Coverage Ratio. It’s a type of loan used primarily for properties that generate rental income, like duplexes and apartment buildings. These loans factor a property’s ability to generate enough rent to cover its mortgage payments.

The DSCR is calculated by dividing a duplex’s monthly mortgage payment into its rent. For example, let’s say a Minneapolis duplex with two 3 bedroom units generates $4000 a month in rent. Principle payments, interest, taxes and insurance (PITI) are $3000 per month. $4000/$3000 = 1.33 percent.

In this case, the property generates 33 percent more revenue than what is needed to pay the debt. To a banker, that means it is likely to take in enough income to cover the loan and then some.

Do banks like to see a minimum DSCR? Yes. Most lenders want to see a minimum DSCR of .90 or higher.

A DSCR loan is in many ways a safer bet for a lender.

And since it focuses more on the revenue the property generates than a buyer’s personal finances, it can also be a tremendous tool for real estate investors.