By Bill Lyons | Published on February 27, 2023
TABLE OF CONTENTS

    Real estate investors can choose many different types of home loans to finance their property purchases. A DSCR loan allows investors to avoid high rates, lengthy approval processes, and stringent lending criteria by qualifying based on cash flow, also known as net operating income, instead of personal income. 

    This DSCR calculator can help you determine your debt service coverage ratio to ensure a high enough net operating income (NOI) to pay back the loan and ensure a return on investment. Keep reading to learn how to calculate DSCR or use our calculator below to help you determine whether you qualify for a loan. 

    How Do I Calculate DSCR?

    Our calculator makes finding your DSCR easy. We only need a few key pieces of information to help you determine whether you can qualify for a DSCR loan. Here’s how to calculate DSCR:

    • 1. Enter the Purchase Price

      Enter the total cost of your property.

    • 2. Enter the Interest Rate

      Interest rates vary depending on credit score and change throughout the year. You can find today’s current interest rates by doing a quick search online or visiting this page.

    • 3. Tell Us Your Loan Term in Years

      DSCR loans have terms of anywhere from 5 to 25 years with the length determined by the lender based on several financial factors, such as property type and projected cash flow.

    • 4. Enter Estimated Taxes

    • 5. Enter HOA Fees

    • 6. Enter Down Payment

    • 7.Indicate the Total Loan Amount

      Loan amounts vary, with limits up to $5 million. The lender will determine your total loan amount based on your DSCR. However, you can enter how much you need to borrow into our DSCR calculator to help you find your DSCR.

    • 8. Review Loan Payment

      The DSCR calculator will determine your loan payment based on the other information you’ve given us. This metric will tell us your monthly debt obligations, which we’ll compare to net operating income.

    • 9. Enter Insurance

      Let us know how much you expect to earn from the property and subtract expenses. For example, if you purchase an apartment complex, your income will include total rent payments minus expenses like marketing, maintenance, and other services.

    • 10.Enter Gross Rental Income

    • 22. Review Your DSCR

    Once you’ve entered all the necessary information, our DSCR calculator will give you a decimal. This final number is your debt service coverage ratio that lenders use to determine your eligibility for a loan.

    What Is a Debt Service Coverage Ratio (DSCR)?

    Debt service coverage ratio (DSCR) is a metric used by lenders and investors to determine how well a rental property performs. For example, investors might use it to determine if they’re making a profit, while lenders use it to determine a borrower’s ability to repay a loan. 

    Real estate investors may have lower taxable income because they take deductions on their tax returns. With conventional commercial loans, this adjusted income might not be enough to qualify. Instead, lenders can use the DSCR to determine eligibility based on cash flow, demonstrating if the property generates enough income for a borrower to repay the loan. Additionally, the higher a DSCR, the more an investor earns, which is crucial for determining if they can turn a profit after paying their debts and provide them with a cushion for paying additional expenses.

    It’s important to note that DSCR loans are designed for real estate investors. Therefore, to purchase a primary residence, you’ll need to choose another type of funding, such as a conventional mortgage, Non-QM loan, or a first-time home buyer grant. 

    What DSCR Do I Need to Qualify for a Loan?

    A DSCR of 1 demonstrates that you have enough cash flow to repay the loan. However, most lenders require borrowers to have a higher DSCR because it allows for extra cash for expenses that won’t compromise their ability to repay the loan. The higher your DSCR, the stronger your position and the more likely you’ll be eligible for a loan. 

    The minimum DSCR required for a loan varies by lender and condition of the economy. For example, lenders may accept lower ratios if more credit is available. That said, lenders usually require a DSCR of at least 1.25. 

    Borrowers may still qualify for a loan with a lower DSCR as long as they can prove their ability to repay the loan in other ways, such as using personal income documentation. Griffin Funding allows you to qualify for a loan with a DSCR as low as 0.75. However, a higher DSCR can get you better terms and reduce your interest rate. 

    DSCR Formula

    Again, the debt service coverage ratio is the decimal used to compare your net cash flow to your mortgage debt. Our calculator uses this DSCR formula to calculate your ratio: DSCR= monthly NOI/debt payments. 

    If you don’t know your NOI, you can use the formula: NOI= (1-expenses)(1-vacancy)GI

    In this calculation, the GI is your gross income — the monthly rent your tenants pay you. Your expenses include operating costs, such as paying employees, maintenance and repairs, or cleaning. Meanwhile, vacancy is the rate of how often you don’t have tenants. 

    If you’re having difficulty calculating DSCR, you can use the advanced version of our calculator, which considers your gross rental income, vacancy rate, and operating expenses. 

    How Does DSCR Affect the Loan Approval Process?

    Your DSCR is one of the most significant metrics lenders use to determine loan eligibility and amounts, so you must ensure your ratio meets those requirements. However, since these loans are based on the NOI of a property, qualifying is easier than some other types of commercial loans. The application process is also much more streamlined since the requirements for DSCR loans are more flexible than other types of financing. 

    The DSCR loan approval process works similarly to other real estate loans. For example, you’ll be required to pay closing costs, including origination, appraisal, and escrow fees, after loan approval. Additionally, if you’ve put down an earnest money deposit, we can provide a streamlined experience to help you get approval and funding quickly. 

    Can a Low DSCR Be Improved?

    We recommend calculating DSCR before applying for a loan to ensure you can prove your ability to repay. If your DSCR is too low, you may not qualify for a loan, or your maximum loan amount might be too low to purchase property. Additionally, increasing your DSCR can reduce interest rates and improve the odds of getting approved. A few ways borrowers can improve a low DSCR before applying for a loan include:

    • Reducing operating costs
    • Increasing rental income
    • Refinancing the existing mortgage
    • Raising the property value

    You still have options if you don’t qualify for a DSCR loan based on your ratio. Griffin has more flexible requirements than other lenders, but if you fall below our requirements, you might qualify for another loan you can use for investing. For example, you can compare HELOC vs. Home Equity loans to determine whether your primary residence has enough built-up equity to fund your purchase. 

    How Does DSCR Differ from Other Financial Ratios?

    DSCR is just one financial ratio lenders use to determine loan eligibility for investors. However, depending on the type of loan you get, there are a few other ratios to consider, including the following:

    • Interest coverage ratio: The interest coverage ratio compares your profits to the interest payment on debts instead of the total amount of debt itself. This ratio is similar to DSCR and can be used to help lenders determine if a company or borrower can pay back its debt. 
    • Asset coverage ratio: This ratio compares your ability to cover debt services by selling off assets. 
    • Cash coverage ratio: The cash coverage ratio determines if you can repay your debt using cash on hand.

    Final Notes

    DSCR loans can help investors of all types qualify for a loan based on cash flow instead of personal income. Griffin Funding can calculate your DSCR to determine your ability to repay the loan and the amount you qualify for. Then, once you’re ready to invest in real estate, you can apply for a DSCR loan. Our mortgage experts can guide you through every step of the process — from application to closing — for a streamlined experience. Apply for a DSCR loan with Griffin Funding today. 

    Bill Lyons

    Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 21 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up important with changes in the industry to deliver the most value to Griffin's clients.