The denominator of the DSCR ratio is the property’s underwritten monthly payment, often abbreviated to PITIA: Principal, Interest, Taxes, Insurance, and (where applicable) Association dues. Similar to the DSCR Lender underwriting methodology of rental income (the numerator in the DSCR ratio) that is viewed as very borrower-friendly (with no credit loss or vacancy “haircuts,”), DSCR Loan underwriting for the expense side is viewed similarly, if not even more borrower-friendly than revenue methodology.
Even so, while the debt service (interest payments and typically principal) is often by far the biggest “expense” for real estate investors utilizing leverage and is always included in the DSCR Ratio (the “PI” in PITIA), the only other expenses included are property taxes, property insurance and any HOA dues. This of course means that many expenses that borrowers can be expected to incur, such as utilities, repairs and maintenance, management fees, lawncare and landscaping and more; are not included. Whether that is a good methodology for DSCR Lenders or not is irrelevant to savvy investors; it’s unmistakably borrower-friendly.
There are some additional items that are rarely also included in the PITIA denominator by DSCR Lenders but are important to note, as they can be significant and material to the DSCR Loans they apply to. These items include special assessments, ground rent on a leasehold estate or monthly payments due if the property has a lease or loan on solar panels that are approved according to FNMA guidelines.
However, two of the bigger expenses typically incurred by residential real estate rental property owners are included: property taxes and property insurance. While the ways that DSCR Lenders determine the underwritten expense amounts for these two items are pretty consistent and straightforward, it’s important for the best-prepared borrowers to understand the methodology and also some of the “nuance cases” that are out of the ordinary, but can definitely come up from time to time.
Property taxes are one of the largest, and most variable, components of PITIA, and DSCR Lenders put a lot of effort into making sure the number they use for underwriting reflects what will actually be paid going forward, not just the figure on the latest bill.
For most existing properties in standard acquisition transactions or refinances, where the property has been assessed at or near its market value for several years, DSCR Lenders will start with the most recent assessed value and apply the prior year’s tax rate (or “millage”) to calculate annual taxes. This is the default because in many jurisdictions, the assessed value is already reasonably current and will remain largely the same after the sale, aside from normal annual adjustments.
However, there are important situations where the assessed value is no longer reliable and using it would understate the true future tax obligation. In these cases, DSCR Lenders will project taxes forward using a different base, often the appraised market value or post-completion value, combined with the applicable tax rate.
Determining the property tax figure is typically a three-step process for DSCR Loans. First, the DSCR Lender will typically find the current tax rate (“millage”). The tax rate is usually expressed as either a percentage (e.g., 1.25%) or millage (e.g., 12.5 mills = $12.50 tax per $1,000 of assessed value). This can usually be found on the county tax assessor’s website, the latest tax bill or in the appraisal’s tax data section.
Next, they will select the correct value base. For most existing properties (i.e. not newly built or majorly renovated), by using the most recent assessed value. For new construction or properties coming out of a major rehab, DSCR Lenders will use the post-completion appraised value because the improvement hasn’t been fully assessed yet. The third step involves addressing potential quirky situations and can include properties with a loss of temporary exemptions (e.g., homestead), where the tax bill has to be adjusted if a homeowner is selling the property to be used by the borrower as a rental, and the jurisdiction has tax rate discounts for owner-occupied homes, veterans or senior citizens. Additionally, if there’s an outdated assessment such as if the property hasn’t been reassessed in years and is far below market. In this case, the DSCR Lender may use judgment to up the projected taxes based on the new appraised value.
When DSCR Loans are used to finance new construction or properties with major renovations, property taxes are usually based only on the land value in the year the property is completed because the structure hasn’t yet been added to the tax roll. The first-year bill can be dramatically lower than it will be in the second year and beyond. DSCR Lenders will typically project taxes at the post-completion value to avoid understating the actual future property taxes that will be incurred during the loan’s term. These adjustments can be significant because, a property will have a significantly lower tax bill in the year it is built or fully renovated as many jurisdictions don’t prorate billing based on when the property was completed and will simply give a much lower land-based bill for the year of completion, even if the property was fully up and running early in the year.
Investors should also be on the lookout for homestead exemptions, which reduce property taxes for owner-occupied primary residences. DSCR Loans are strictly for non-owner-occupied investment properties, so these exemptions vanish by definition at closing for situations where the borrower is buying a property previously used as a personal residence. In some states, especially Texas and Florida, this can mean a 20–40% tax increase.
Multiple Taxing Authorities can also come into play for DSCR Loans. In many areas, property tax is the sum of county, city, school district, and special district levies. These may be billed together or separately. DSCR Lenders will total all applicable amounts, even if they appear under different names or arrive on separate statements.
Some jurisdictions reassess property values infrequently, meaning the assessed value can lag far behind current market value leading to outdated assessed values. Some DSCR lenders will override the outdated figure with the appraised value and the current tax rate to estimate a realistic bill.
One of the easiest ways for a DSCR loan to run into trouble late in underwriting is when the property tax estimate used at application turns out to be too low once the lender verifies it. This often happens in the “nuance” scenarios, new construction where the first-year bill is land-only, recently renovated properties that haven’t been reassessed, or buying from an owner-occupant whose bill is reduced by a homestead exemption that will disappear at closing. It can also occur if the property is in an area with multiple taxing authorities, and one or more-line items were overlooked in the initial math. The best way to avoid surprises is to be on the lookout if these adjustments may apply (i.e. new construction, buying a homestead, multiple taxing authorities or outdated assessed values) and pre-emptively run tax projections before application, using the current tax rate and the value the DSCR Lender is likely to use (appraised/post-completion value if reassessment is expected). If the full “post-closing” bill is received from the start, there is a much lower likelihood a property tax “surprise” will throw off qualification or the numbers near closing.
Q: How do DSCR Lenders calculate property taxes for underwriting?
A: DSCR Lenders typically start with the property’s most recent assessed value and apply the current or prior year’s tax rate to estimate annual taxes. If the assessed value is outdated, based only on land (as in new construction), or reduced by temporary exemptions like a homestead, they adjust the calculation using the appraised or post-completion market value and remove any discounts that won’t apply after closing. This ensures the PITIA, and the DSCR ratio, reflect the realistic property tax bill the investor will owe in the first full year of ownership.
For DSCR underwriting, the insurance number in PITIA comes from the actual insurance binder or invoice you (or your agent) provide before closing. Early in the process, loan applications often rely on placeholder estimates pulled from online tools (e.g., Zillow/Redfin “owner costs,” generic insurance calculators, or a quick agent ballpark). Those are only for pre-qual purposes; once the DSCR Loan enters “final underwriting,” the lender replaces any estimate with the binder’s annual premium to calculate PITIA and the final DSCR.
Policies must meet standard lender requirements, i.e. correct coverage type (dwelling/fire or landlord form), replacement-cost limits sufficient for the structure, acceptable deductibles, and any required endorsements. Two things that can trip some investors up include the fact that liability coverage (e.g., $300k or $1M personal/landlord liability) may be smart to carry, but it usually isn’t required by DSCR Lenders. However, if it’s bundled inside your property policy, its cost is part of the binder total and therefore included in the PITIA; if it’s a separate standalone liability policy, DSCR Lenders generally do not include that separate premium in PITIA (unless the borrower specifically wants the liability insurance policy escrowed). Secondly, “Rent Loss” coverage is included in the number if required by the DSCR Lender. Even if not required, if your chosen property policy includes it, the cost is baked into the binder and thus still included in PITIA because lenders use the total annual premium on the invoice, regardless of the internal coverage mix.
Additionally, it’s important to note that for DSCR Loans, flood insurance premiums are also included in the PITIA if the property is in a Flood Zone. For condos and some PUDs, part (or all) of the property insurance may be carried by the HOA master policy. DSCR Lenders don’t double-count: the master premium is not added to the “Insurance” line because it’s already captured inside the HOA dues portion of PITIA. If the master policy stops at the exterior/common elements, you’ll still need a “walls-in” HO-6 (or equivalent) policy for interior improvements; and that HO-6 premium listed separately in the Insurance line. Net effect: master coverage flows through HOA dues, your unit policy flows through Insurance, and both are included in total PITIA. If a property requires windstorm coverage (usually required if located within 25 miles of the Atlantic Ocean or Gulf of America coast), and it isn’t included in the hazard insurance policy (i.e. covered under a separate windstorm policy), this windstorm insurance premium amount will be included in the PITIA amount as well.
HOA dues are included in the PITIA calculation when the subject property is part of a condominium or planned unit development (PUD). DSCR Lenders verify this amount using the most reliable available sources, typically the condo questionnaire completed by the HOA or property management company, the appraisal (which often includes HOA fee details) or direct documentation from the association.
For condos and PUDs, these dues can meaningfully affect the DSCR ratio, especially when they include costs that would otherwise be paid separately, such as utilities, landscaping, or master insurance coverage. If the HOA provides master property insurance (either full coverage for the unit or partial coverage for certain risks), that portion is not duplicated in the insurance line of PITIA, it’s captured in the “A” (HOA dues) figure instead.
One common pitfall for real estate investors in condos or PUD units is relying on HOA fee amounts from online real estate listings or aggregator sites like Zillow or Redfin. These figures are often outdated, rounded, or copied from older MLS entries without verification. Inaccurate HOA data can significantly distort the initial DSCR calculation. It’s not unusual for the true dues to be higher, or occasionally lower, than what appears online. Because of this, savvy investors treat the HOA amount in a listing as a placeholder only and then confirm it once the lender receives both the HOA questionnaire and the appraisal. These two sources together typically resolve any discrepancies and ensure the lender is underwriting with the correct, up-to-date figure.
Q: Are HOA dues included in the PITIA calculation for DSCR Loans?
A: Yes. DSCR Lenders include monthly HOA dues in the PITIA calculation when the property is part of a condominium or planned unit development. However, unlike property taxes and insurance, HOA dues are not typically escrowed by the lender or loan servicer, the investor pays them directly to the association.
Up Next: Stage 7: Credit Approval and Finalization of Terms for your DSCR Loan!
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