The Debt Service Coverage Ratio (DSCR) tells a lender whether a property generates enough income to pay its debt. It is calculated as net operating income (NOI) divided by total debt service (principal plus interest). A DSCR of 1.0 means income exactly covers the loan payments; lenders typically require a cushion — often 1.20 to 1.25 or higher — and frequently set a minimum DSCR as a loan covenant.
DSCR = Net Operating Income ÷ Total Debt Service
How to read a DSCR
A higher DSCR means more income cushion above the debt payments:
- DSCR below 1.0 — income does not cover debt service (a shortfall)
- DSCR = 1.0 — income exactly covers debt service, no margin
- DSCR of 1.25 — income is 25% above the required debt payments
DSCR as a loan covenant
Commercial loans often require the borrower to maintain a minimum DSCR throughout the loan term. Falling below it can trigger a technical default, so operators monitor DSCR continuously rather than just at underwriting.
A property has $600,000 of NOI and $480,000 of annual debt service. Its DSCR is 600,000 ÷ 480,000 = 1.25, meaning operating income is 25% higher than the loan payments.