The debt service coverage ratio (DSCR) is calculated as net operating income divided by annual debt service (mortgage principal and interest payments), used by lenders to assess a property's ability to cover mortgage payments from its operating income. Most commercial lenders require a minimum DSCR, commonly around 1.20 to 1.35, providing a cushion above break-even debt coverage.
DSCR formula and interpretation
| DSCR value | What it means |
|---|---|
| 1.00 | NOI exactly covers debt service (no cushion) |
| 1.25 | NOI covers debt service with 25% cushion |
| Below 1.00 | NOI insufficient to cover debt service |
What to watch for before committing
Lender-specific minimum requirements
Confirm the specific DSCR minimum your target lender requires, since this varies by lender and property type.
NOI calculation accuracy
Verify the NOI figure used in DSCR calculation is accurate and sustainable, not an inflated pro forma projection.
Impact on maximum loan amount
Understand how DSCR requirements, combined with NOI, determine the maximum loan amount a lender will offer.
Interest rate sensitivity
Model how DSCR changes with different interest rate scenarios, since rate changes directly affect debt service and coverage.
Single-tenant vs multi-tenant risk consideration
Recognize lenders may apply stricter DSCR requirements for single-tenant properties given concentrated tenant risk.
Refinancing risk assessment
Consider how DSCR requirements might affect refinancing feasibility if interest rates rise significantly before your loan term ends.
When you need to know this
- Securing financing for a property acquisition — understanding lender requirements that determine maximum loan amount
- Evaluating refinancing options — assessing whether current NOI supports refinancing under new interest rate conditions
- Underwriting an investment purchase — calculating DSCR to confirm financing feasibility before committing to a deal
- Stress-testing an investment's financial structure — modeling DSCR sensitivity to changes in income or interest rates
Frequently asked questions
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