What Is DSCR?
The Debt Service Coverage Ratio (DSCR) measures a property's ability to cover its debt payments from net operating income. A DSCR of 1.0 means income exactly equals debt payments, while anything above 1.0 indicates a surplus. Lenders typically require a minimum DSCR of 1.20-1.25 for commercial real estate loans.
DSCR is the primary metric lenders use to evaluate the risk of commercial and investment property loans. It is also widely used for DSCR loan programs that qualify borrowers based on property cash flow rather than personal income.
DSCR Formula
DSCR Interpretation
| DSCR Value | Meaning | Lender View |
|---|---|---|
| Below 1.0 | Income doesn't cover debt | Loan denied / high risk |
| 1.0 - 1.19 | Barely covers debt | Marginal, higher rates |
| 1.20 - 1.35 | Comfortable coverage | Typical minimum for approval |
| 1.35 - 1.50 | Strong coverage | Favorable terms |
| Above 1.50 | Excellent coverage | Best rates and terms |
Frequently Asked Questions
What DSCR do lenders require?
Most commercial lenders require a minimum DSCR of 1.20 to 1.25. Some DSCR loan programs for residential investors may accept as low as 1.0. SBA loans typically require 1.15-1.25 depending on the program.
How do I improve my DSCR?
You can improve DSCR by increasing NOI (raising rents, reducing expenses) or decreasing debt service (larger down payment, longer amortization, lower interest rate). A combination of both strategies is most effective.
What is included in debt service?
Debt service includes all principal and interest payments on the property's loans. It typically does not include property taxes, insurance, or operating expenses -- those are already deducted when calculating NOI.