The debt service coverage ratio, DSCR, is a property's net operating income divided by its annual debt service (principal and interest). A DSCR of 1.25 means the building earns 25 percent more than the loan payments require.
Lenders use it as a basic safety test: how far can income fall before the loan cannot be paid from the property?
How it is calculated
DSCR = NOI ÷ annual debt service. If NOI is 1,000,000 and the yearly payment is 800,000, DSCR is 1.25.
Two inputs decide the answer:
- Which NOI. In-place, trailing twelve months, underwritten or pro forma. Lenders usually size on their own underwritten NOI, which often applies a vacancy and credit loss floor, a market management fee and replacement reserves that the borrower's figure leaves out.
- Which payment. The actual loan terms, or a sizing constant. Interest-only periods give a much higher DSCR than the amortizing payment, so a lender may test both.
Typical thresholds
Minimums vary by lender, property type and loan program. Many conventional multifamily and commercial loans look for a DSCR somewhere around 1.20 to 1.35, and riskier property types or weaker sponsors face more. Treat any number as indicative and check the actual term sheet.
Where it misleads
DSCR looks only at income against the payment. It does not show how much of the property's value the loan represents (that is loan-to-value) or what the lender recovers on a default (that is closer to debt yield). A low-rate environment can give a comfortable DSCR on a loan that is large relative to the income.