A DSCR loan qualifies a rental property on the rent it brings in. Your pay stubs, tax returns and personal debt-to-income ratio stay out of it. The lender compares the property's monthly rent to its full monthly payment and wants the rent to cover enough of it. DSCR loans are non-agency loans, meaning FHA, VA, Fannie Mae and Freddie Mac don't set their rules, so each lender writes its own. AAA Capital Funding's terms are called out below wherever they differ from the usual market terms. The DSCR calculator runs the ratio on any property in a few seconds.
The DSCR formula
DSCR stands for debt service coverage ratio. For a rental, it's one division:
DSCR = monthly rent ÷ monthly PITIA
PITIA is the full monthly payment on the property: principal, interest, taxes, insurance and association dues (HOA). A ratio of 1.00 means the rent covers the payment exactly. At 1.25, the rent is 25% more than the payment. At 0.75, the rent covers three quarters of it and you cover the rest.
What counts in PITIA
| Counted in PITIA | Usually left out |
|---|---|
| Principal and interest on the new loan | Vacancy allowance |
| Property taxes | Repairs and maintenance |
| Homeowners (hazard) insurance, including windstorm | Property management fees |
| Flood insurance, when the property needs it | Utilities the owner pays |
| HOA or association dues | Your personal debts and income |
Most DSCR lenders work from the payment alone and leave operating costs to you. That keeps the math clean, and the calculator runs it the same way an underwriter does.
A Broward single-family rental, run both ways
Take a $400,000 single-family rental in Broward County with 25% down at 5.75% on a 30-year fixed. A rental doesn't get Florida's homestead exemption, so taxes run about 1.9% of the price a year, and insurance is about $283 a month.
| Item | Amount |
|---|---|
| Purchase price | $400,000 |
| Down payment (25%) | $100,000 |
| Loan amount | $300,000 |
| Principal and interest | $1,750.72 |
| Property taxes ($400,000 × 1.9% ÷ 12) | $633.33 |
| Homeowners insurance | $283.00 |
| Full payment (PITIA) | $2,667.05 |
With a $3,200 lease, the DSCR is $3,200 ÷ $2,667.05 = 1.20. That clears 1.00 at nearly any DSCR lender.
Now drop the rent to $2,300. The ratio becomes $2,300 ÷ $2,667.05 = 0.86. A lender with a 1.00 minimum would pass on it. At AAA Capital Funding it qualifies, because AAA goes down to 0.75. At this price, the rent needed is $2,668 for a 1.00 ratio and $2,001 for 0.75.
Run it the other way and the same $3,200 rent at 25% down supports a price up to about $668,000 at a 0.75 ratio. The DSCR calculator shows that highest price for any rent you enter.
DSCR pricing runs on its own rate sheet, set by the ratio, your credit score, the down payment and the prepayment terms. Plug the rate you're quoted into the calculator and the ratio updates.
Where the rent figure comes from
The rent side of the formula comes from one of two places:
- A signed lease on a property that's already rented.
- The appraiser's market rent. On a single-family rental the appraiser fills out Fannie Mae Form 1007, the comparable rent schedule. On 2 to 4 units it's Form 1025, the small residential income property appraisal report. A vacant property or a purchase with no tenant yet uses this figure.
When a lease and a market rent disagree, many lenders use the lower of the two. Some allow short-term rental income backed by booking history or market data, which matters in Florida's vacation markets.
AAA Capital Funding counts 100% of the rent. That's worth knowing because owner-occupied loans work differently. On an FHA or Conventional loan where you live in one unit of a 2 to 4 unit home and rent the others, the lender counts 75% of the rent. A DSCR loan has no 25% haircut at AAA.
If there's a property you're already eyeing, call AAA Capital Funding at 888-601-8344 and we'll work the ratio on it with you over the phone.
Ratio thresholds and what they mean
| DSCR | What the rent does | How the market treats it |
|---|---|---|
| 1.25 and up | Covers the payment with 25% to spare | Best pricing and highest loan-to-value at most lenders |
| 1.00 to 1.24 | Covers the payment in full | Standard approval at most DSCR lenders |
| 0.75 to 0.99 | Covers 75% to 99% of the payment | Many lenders stop at 1.00; AAA Capital Funding finances down to 0.75 |
| Below 0.75 | Covers less than 75% | Below AAA's floor; a bigger down payment or lower price brings it up |
Down payment, credit and the other terms
With no agency rulebook, each lender sets its own terms. These are the ranges you'll run into most.
Down payment. Most DSCR purchases run 20% to 25% down, which is a loan-to-value ratio (LTV) of 75% to 80%. A lower ratio, a lower credit score or a cash-out refinance tends to push the required equity higher.
Credit. The lender pulls credit and uses your score to price the loan and set the maximum LTV. Most DSCR programs start somewhere in the 620 to 680 range.
Reserves. Expect to show several months of PITIA in the bank after closing. Three to six months is common, and the count can rise when you own other financed rentals.
Prepayment penalty. Most DSCR loans carry one, often stepping down over three to five years (a 5-4-3-2-1 schedule charges 5% of the balance in year one, 4% in year two and so on). A shorter penalty or none at all usually costs more in rate.
Ownership. Many DSCR lenders let you close in an LLC.
Seller credits. Seller help runs smaller on investment purchases. For comparison, Fannie Mae caps it at 2% on an investment property, and DSCR lenders set their own caps.
Who a DSCR loan fits
A DSCR loan is a business-purpose loan. Under the official interpretation of Regulation Z, credit to buy a rental you won't occupy is deemed business credit, so the personal ability-to-repay income check that applies to a home you live in doesn't apply here. If you plan to live in the property more than 14 days in the coming year, it isn't a non-owner-occupied rental, and a DSCR loan isn't the right tool.
It tends to fit investors like these:
- Self-employed investors whose tax returns show little income after write-offs and depreciation.
- Investors who already own several financed rentals and keep running into debt-to-income limits.
- Buyers who want to close in an LLC.
- Short-term rental buyers whose income comes from bookings instead of a W-2.
If you want to live in the property, look at FHA or Conventional instead. A 2 to 4 unit home where you live in one unit qualifies with 3.5% down on FHA. The FHA house hacking guide walks through it, and the house hacking calculator runs the math.
How to raise a DSCR
Start from the same $400,000 rental with 25% down, but with $1,950 a month in rent. That's a 0.73 ratio, just under AAA's 0.75 floor. Each change below moves it over:
| Change | Full payment (PITIA) | DSCR |
|---|---|---|
| Starting point | $2,667.05 | 0.73 |
| Put 30% down ($120,000) | $2,550.34 | 0.76 |
| Insurance $100 a month lower | $2,567.05 | 0.76 |
| Negotiate the price to $375,000 (25% down) | $2,518.05 | 0.77 |
| 30% down and insurance $100 lower | $2,450.34 | 0.80 |
| Appraiser's market rent comes in at $2,050 | $2,667.05 | 0.77 |
A few notes on each lever:
- Down payment lowers principal and interest directly. Every extra dollar down reduces the denominator.
- Insurance is a bigger lever in Florida than most places. State law requires insurers to give credits for wind mitigation features, so a wind mitigation inspection on a home with a newer roof, hurricane shutters or impact windows can bring the premium down.
- HOA dues count dollar for dollar. A $250 monthly fee takes $250 more rent to hold a 1.00 ratio, or $187.50 more to hold 0.75.
- Rent is the top of the formula. If the current lease runs below market, the appraiser's Form 1007 or 1025 market rent can show what the property earns, and a renewal at market lifts the ratio.
- Rate matters too. Buying the rate down with points lowers principal and interest.
On a duplex, triplex or fourplex, the DSCR runs on the total rent from every unit against one payment, so compare the ratio on a small multifamily against a single-family at the same price.
For a property under contract or one you're watching, call AAA Capital Funding at 888-601-8344. We'll run the ratio with you on the actual rent, tax and insurance figures, and you'll know what down payment carries it before you commit.