# Debt Service Coverage Ratio (DSCR) for STR Loans — What Lenders Require and How to Calculate It

> DSCR (Debt Service Coverage Ratio) is the metric lenders use to determine whether a short-term rental property generates enough income to cover its mortgage payments. Learn how to calculate DSCR, what ratios STR lenders require, and how to improve your property's coverage ratio to qualify for better financing terms.

Canonical: https://www.underwriteapp.com/learn/what-is-dscr


## Definition

**Debt service coverage ratio** (DSCR) is the ratio of a property's [net-operating-income](/learn/net-operating-income) to its annual debt service (total mortgage payments).

$$\text{DSCR} = \frac{\text{Net Operating Income}}{\text{Annual Debt Service}}$$

It answers: **does this property earn enough to cover its mortgage?**

- **DSCR > 1.0x** — the property generates more income than its mortgage costs. It cash-flows.
- **DSCR = 1.0x** — income exactly equals the mortgage. No margin for error.
- **DSCR < 1.0x** — the property does not cover its own debt. You're subsidizing it out of pocket.

## How to Calculate DSCR

### Step 1 — Calculate net operating income

NOI = Gross Revenue − Operating Expenses (before debt service).

For an STR, operating expenses include platform commissions, cleaning, supplies, property management, property taxes, insurance, and utilities. See the [net-operating-income](/learn/net-operating-income) guide for a full breakdown.

**Example:** $55,000 gross revenue − $24,000 operating expenses = **$31,000 NOI**

### Step 2 — Calculate annual debt service

Annual debt service = monthly mortgage payment (principal + interest) × 12. Do not include property taxes or insurance here — those are already in your operating expenses.

**Example:** $262,500 loan at 7.25%, 30-year term → $1,790/month P&I → **$21,480 annual debt service**

### Step 3 — Divide

**Example:** $31,000 ÷ $21,480 = **1.44x DSCR**

This property generates 44% more income than it needs to cover the mortgage — a healthy margin.

## Why DSCR Matters for STR Investors

### It determines your loan eligibility

DSCR loans are the most common financing path for STR investors. Unlike conventional loans that rely on your personal income (W-2, tax returns), DSCR loans qualify you based on the property's income. This makes them popular with:

- Self-employed investors whose tax returns don't reflect true earnings
- Investors scaling beyond 4–10 financed properties (Fannie/Freddie limits)
- Buyers purchasing in an LLC

### It's the real bankability test

[what-is-cap-rate](/learn/what-is-cap-rate) and [cash-on-cash-return](/learn/cash-on-cash-return) tell you if a deal is attractive. DSCR tells you if a lender will fund it. A property with a great cap rate but a DSCR below 1.0x will struggle to get financed without a large down payment or rate buydown.

## DSCR Benchmarks for STR Properties

| DSCR | What It Means |
|------|---------------|
| ≥ 1.50x | Strong coverage. Most lenders will offer competitive terms. |
| 1.25x–1.49x | Solid. Meets most lender minimums with room for vacancy. |
| 1.00x–1.24x | Tight. Lender may require larger down payment or reserves. |
| < 1.00x | Negative coverage. Limited to specialty lenders or cash purchase. |

## What Moves DSCR

- **Revenue (occupancy × ADR)** — Higher [occupancy-rate](/learn/occupancy-rate) or nightly rates increase NOI and improve DSCR.
- **Operating expenses** — Cutting unnecessary costs or self-managing instead of hiring a property manager improves NOI.
- **Interest rate** — A lower rate reduces annual debt service, improving DSCR. A 1-point rate drop on a $300k loan improves DSCR by roughly 0.15x.
- **Down payment** — A larger down payment reduces the loan amount, lowering debt service and improving DSCR.
- **Loan term** — A 30-year term has lower payments than a 15-year term, improving DSCR (at the cost of more interest over the life of the loan).

## Common Mistakes

**Confusing DSCR with cash-on-cash return.** DSCR measures income vs. debt payments. [cash-on-cash-return](/learn/cash-on-cash-return) measures cash flow vs. cash invested. A property can have a 1.5x DSCR but a mediocre CoC if you put a lot of cash in.

**Using gross revenue instead of NOI.** Lenders calculate DSCR with NOI, not gross revenue. A property grossing $80,000 with $50,000 in expenses has a $30,000 NOI — that's the number that matters.

**Ignoring seasonality.** STR income is seasonal. A mountain cabin might have a 2.0x DSCR in winter and 0.5x in summer. Lenders and you should evaluate DSCR on an annualized basis, but budget for months where income won't cover the mortgage.