Divide gross monthly rent by the full monthly PITIA payment. A $2,800 rent against a $2,200 payment gives a DSCR of 1.27 — the property covers its payment with 27 percent to spare.
Three examples below show the formula on a clean pass, a borderline file, and a failing one, plus what lenders count as rent.
What is the DSCR formula?
The formula never changes:
DSCR equals gross monthly rent divided by monthly PITIA — principal, interest, taxes, insurance, and HOA or assessments if any.
Use the proposed payment, not the current one, when testing a refinance. For a purchase, use the quoted payment at your expected rate and term. Round to two decimals; lenders do.
One subtlety: some lenders test interest-only quotes against the interest-only payment, while others test against the fully amortizing equivalent. Ask which denominator your quote uses before celebrating a thin pass. The minimums themselves are covered in what DSCR ratio lenders require.
Example 1: the clean pass
- Gross monthly rent: $2,800 (leased, 12-month term)
- Proposed PITIA: $2,200
- DSCR: 2,800 / 2,200 = 1.27
This clears every standard cash-out minimum we track. Files like this get approved on ratio without compensating factors — the rest of underwriting is credit, reserves, and appraisal.
Example 2: the borderline file
- Gross monthly rent: $2,400
- Proposed PITIA: $2,300
- DSCR: 2,400 / 2,300 = 1.04
At a 1.00 minimum program, this passes — barely. At a 1.20 or 1.25 program, it fails outright. Borderline files live or die on program selection: the same property can be approvable and deniable in the same week depending on which lender's matrix you land on.
If your deal looks like this, read how to raise your DSCR before refinancing before applying. Small moves — a lower loan amount, documented rent upside, tackling the tax assessment — often push a 1.04 over the line.
Example 3: the failing file
- Gross monthly rent: $2,100
- Proposed PITIA: $2,350
- DSCR: 2,100 / 2,350 = 0.89
Below 1.00, the property does not cover its own payment. Most cash-out programs decline here regardless of credit score. A few purchase programs entertain sub-1.00 ratios with heavy compensating factors, but cash-out at 0.89 is not a real application — it is a wish.
The honest fixes: borrow less, raise the rent first and reapply, or accept that this property is not a refinance candidate today.
Interest-only or amortizing: which payment do you test?
It depends on the quote — and you must ask, because the two answers can differ wildly. Some lenders test interest-only loans against the interest-only payment, which flatters the ratio. Others test against what the payment would be on a fully amortizing schedule, which is stricter and arguably more honest about long-run affordability.
Example: a $300,000 loan at 7 percent interest-only costs $1,750 a month in interest. Fully amortizing over 30 years, the same loan costs about $1,996 in principal and interest. Against $2,400 in rent, that is a DSCR of 1.37 under the easy test and 1.20 under the strict one. Same property, same loan, different verdict. Always confirm the denominator before you celebrate — or despair.
What are the common DSCR math mistakes?
We see the same five errors constantly:
- Using net instead of gross rent. The formula takes gross scheduled rent. Subtracting vacancy, management, or maintenance first understates your ratio for no reason.
- Forgetting HOA and assessments. The payment is PITIA, not PITI, when HOA dues exist. A $350 monthly HOA is $350 of denominator.
- Testing the current payment instead of the proposed one. Refinances qualify on the new loan's payment. Your current 4 percent note is irrelevant to the test.
- Using Zillow rent as documented rent. Lenders use leases and appraiser opinions, not listing-site estimates. Run the math on both and believe the lower.
- Ignoring the ratio direction. Higher is better: 1.25 beats 1.05. Newcomers sometimes treat it like an interest rate and read it backwards.
What counts as rent?
Lenders do not take your word for it. They generally use the lower of the in-place lease and the appraiser's market-rent opinion from the rent schedule. Claimed future rent, handshake agreements, and "my neighbor gets more" do not count.
Vacant units get no benefit of the doubt: expect LTV reductions, and do not plan cash-out on an empty property. If you are between tenants, lease first, refinance second.
Short-term rentals get their own handling. A handful of DSCR programs underwrite Airbnb-style income using trailing statements or projection tools, but most apply lower leverage and closer scrutiny than long-term files. If your rent number comes from nightly rates, confirm the program accepts STR income before running the rest of the math — a ratio built on rejected income is fiction.
Bottom line
Run this formula before you apply, using the proposed payment and documented rent. At 1.25 or better you are shopping programs; near 1.00 you are shopping carefully; below it you are restructuring the deal, not the application.
Keep a simple spreadsheet with one row per property: rent, taxes, insurance, HOA, proposed payment, ratio. Update it whenever a lease renews or a quote refreshes. Investors who track the ratio quarterly spot refinance windows — and trouble — months before the ones who only compute it at application time.
Want a second set of eyes on your math? Check your DSCR eligibility — send value, balance, and rent, and get both your ratio and your max cash-out back in writing.