The First Numbers I Check Before a DSCR Deal

When I sat down with a DSCR lender for the first time, I handed over my rent projection and expected them to use it. They didn't. Debt service coverage ratio (DSCR) underwriting starts with the rent number the lender can defend to their credit committee. That number is the lower of the lease amount currently in place and the appraiser's opinion of market rent from the 1007 rent schedule. Your opinion doesn't set the ratio. The appraisal does.

Start with the rent the lender will actually use

The 1007 form is a rent schedule the appraiser completes. It compares your unit to three leased comps nearby and lands on a market rent opinion. If your tenant pays more than that, the lender uses the appraiser's lower figure. If your unit is vacant and you projected top-of-market rent, the lender uses the appraiser's number anyway. I've watched a deal with a signed lease at $1,300 get underwritten at $1,150 because two nearby units rented for less. That small gap pushed the ratio below the lender's minimum.

Before you order the appraisal, pull your own rent comps. Drive the neighborhood if you can. Look at active listings and recent leases. Call the property managers on those comps and ask what the units actually leased for. Your goal is to know whether the appraiser's number will support the purchase price before you spend money on a third-party report.

DSCR isn't cash flow

The debt service coverage ratio compares the property's rent to PITIA—that's principal, interest, property taxes, insurance, and any association dues. Lenders want to see a ratio above 1.0, often 1.15 or 1.25 depending on the loan program. At a 1.25 ratio, rent covers the payment by 25 percent. That sounds healthy.

It isn't. PITIA leaves out vacancy, repairs, management fees, turnover costs, and capital reserves. A property can pass a 1.25 DSCR and still lose money each month once a water heater fails or a unit sits empty for six weeks. I've seen it happen with a single-family rental that looked great on the lender's worksheet. The owner had no repair budget and a two-month vacancy in the first year. The loan stayed current, but the owner fed the property cash from his own checking account. I treat DSCR as a lender's minimum. My own spreadsheet runs a separate number with vacancy, maintenance, and management pulled out of the rent.

Taxes and insurance move the ratio more than the listing sheet shows

The property tax figure in the listing usually reflects the seller's current assessment. You will probably be reassessed at the purchase price. That can push annual taxes up enough to take a full tenth off the ratio. Before I make an offer, I call the county assessor's office and ask how they calculate the new bill for a sale at the price I'm considering. You don't need the exact law, just the formula.

Insurance gets the same treatment. A seller's old policy isn't your quote. I ask an agent for a property-specific quote on the exact address and building type before I run the final numbers. Both of those inputs sit inside the PITIA, so a bad guess on either one changes the loan amount you can actually get.

Section 8 units need a call before the appraisal

If the property has a housing assistance payment, don't assume the lender will count the full rent. Some programs split the tenant's portion from the housing authority's portion, and lenders handle the split differently. I've had a lender count only the tenant-paid portion and ignore the authority's share because the lease addendum wasn't in the file. That changed the ratio enough to kill the deal. Before you pay for an appraisal, ask the lender how they'll treat the Section 8 payment and confirm it in writing.

That's the order I check before I ever spend a dollar on an appraisal.