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
Related Programs and Tools
Frequently Asked Questions
What DSCR do commercial lenders require?
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.
Can I get a loan with a DSCR below 1.0?
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.