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    Debt Service Coverage Ratio (DSCR)

    The ratio of a property's net operating income to its annual debt service, showing how comfortably income covers loan payments.

    Debt service coverage ratio, or DSCR, measures whether a property generates enough income to cover its loan payments. Lenders calculate it by dividing net operating income (NOI) by annual debt service, the total of principal and interest due over a year. A DSCR of 1.0 means income exactly matches the payment, with nothing left over.

    Most commercial lenders want to see a DSCR of 1.20 to 1.35 on stabilized properties. That cushion protects both the borrower and the lender if income dips or expenses rise. Riskier asset types or transitional deals may require 1.40 or higher, while agency multifamily programs sometimes accept 1.15.

    DSCR loans for investors qualify the borrower on property cash flow rather than personal income, which is why the ratio sits at the center of that program. The stronger the DSCR, the more loan proceeds a property can support.

    Formula
    DSCR = Net Operating Income / Annual Debt Service
    Worked Example

    A retail building produces $180,000 in NOI. Its loan carries annual debt service of $138,000. DSCR = 180,000 / 138,000 = 1.30. That clears a typical 1.25 lender minimum with room to spare.

    Why It Matters

    DSCR is often the first number a lender checks. It sets the maximum loan a property can carry and signals how much risk the deal carries. Improve NOI or lower the rate and the ratio rises, which can mean more proceeds or better pricing.

    Related Terms

    Net Operating Income (NOI)

    A property's income after operating expenses but before debt service, income taxes, and capital costs.

    Debt Yield

    Net operating income divided by the loan amount, a leverage independent measure of lender risk.

    Capitalization Rate (Cap Rate)

    The ratio of net operating income to property value, used to gauge return and estimate what a property is worth.

    Amortization

    The schedule that repays a loan's principal over time through regular payments.

    Related Programs & Tools

    DSCR LoansDSCR CalculatorCRE Loan Requirements

    Looking for another term? Browse the full commercial lending glossary.

    Frequently Asked Questions

    Most want 1.20 to 1.35 on stabilized properties. Some agency multifamily programs go as low as 1.15, while transitional or higher risk deals may need 1.40 or more.

    A ratio below 1.0 means income does not cover the payment, so conventional lenders usually decline. A bridge lender may still fund the deal based on a business plan to raise income.

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