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You're thinking about refinancing a rental property. What financial metrics will the lender look at?
On the property side, three numbers do most of the work:
- loan-to-value (LTV)
- debt service coverage ratio (DSCR)
- operating expense ratio (OER)
They don't decide approval on their own, because lenders also weigh your credit, reserves, debt-to-income ratio and the loan program.
Work them out before you apply, and you'll know where your property stands:
What loan-to-value ratio do you need to refinance a rental?
For a conventional rental refinance, usually 75% or less. LTV compares the new loan with what the property is worth. The Consumer Financial Protection Bureau defines LTV as "a measure comparing the amount you are financing with the appraised value of the property."
LTV = new loan amount ÷ appraised value × 100
A lower LTV means more equity, less risk for the lender and usually a better rate. Fannie Mae's Eligibility Matrix caps investment-property refinances run through Desktop Underwriter, its automated underwriting system, at these levels:
Exceptions and extra requirements apply, and portfolio and DSCR lenders set their own limits. Fannie Mae generally requires mortgage insurance only above 80% LTV, so it doesn't usually come into a refinance at these caps. To see how loan size changes your payment, try our mortgage calculator.
How do lenders calculate debt service coverage ratio?
DSCR compares the income a property produces with its loan payments. There are two common versions, and their results aren't interchangeable.
PITIA means principal, interest, taxes, insurance and association (HOA) dues. For the traditional method:
- Net operating income (NOI): effective gross income minus operating costs like property taxes, insurance, repairs and management.
- Annual debt service: 12 months of principal and interest on the loan.
NOI leaves out loan payments, depreciation, income tax and capital expenditures such as a new roof. A DSCR of 1.0 means NOI covers debt service exactly. Below 1.0, the property needs money from elsewhere to pay the loan.
Refinancing several properties together? Combine the NOI from those same properties and divide by their combined debt service. Each DSCR lender sets its own minimum and formula, so check its current guidelines before comparing your number. Our DSCR calculator runs the numbers for you.
A conventional lender usually qualifies you on your debt-to-income ratio instead. It can still count eligible rental income, as long as you have the documents to back it up.
What does operating expense ratio tell a lender?
OER shows how much of a property's income goes on running it. Lower is better, because every dollar of expense you cut adds a dollar to NOI and lifts your traditional DSCR.
OER = operating expenses ÷ effective gross income × 100
Effective gross income is potential rent, minus vacancy and collection losses, plus any other property income such as parking or laundry. Leave out loan payments, depreciation and capital expenditures.
There's no single "good" OER. It varies with property type, age, location and who pays the utilities. Compare yours with your own history and with similar rentals nearby, and be ready to explain a ratio that has climbed. Our operating expense ratio guide covers what to include.
What do the three metrics look like on a real rental?
Here is one single-family rental worked through all three. It appraises at $280,000, rents for $2,600 a month and refinances into a 30-year fixed loan. The 6.5% rate is an illustrative assumption, not a current quote.
Operating expenses total $9,300, so OER is $9,300 ÷ $29,640 = 31.4%.
The cash-out loan sits right at the 75% one-unit cap. The $210,000 is the new loan balance, not the cash you receive. If the existing balance were $180,000, you'd release $30,000 before closing costs and other deductions.
At a traditional DSCR of 1.25, this property's NOI would support a loan of about $214,500 at the same rate. So here the LTV cap limits the loan before cash flow does. A residential DSCR lender would run its own rent ÷ PITIA test, which gives a different figure.
What documents will the lender ask for?
Lenders check these numbers against documents, and the list depends on the loan type.
Fannie Mae's rental income guidance sets out the conventional requirements. Ask a DSCR lender for its checklist before you apply.
In Landlord Studio, you can run a property-level profit and loss report and a rent roll and export them. That gives you the income and expense figures to work out your NOI and OER before the lender asks.
Which metric should you work on before you apply?
Start with the one furthest from your lender's requirement. A high LTV usually means a smaller loan, a different program or waiting for more equity. A low DSCR can improve as rents move to market at renewal or running costs come down, where your leases and local law allow.
For the full process, read when and how to refinance a rental property. If you want to release equity, see our cash-out refinance guide.
This article is general information, not financial advice. Loan limits and requirements vary by lender and program, so confirm figures with your lender.