noun · /diː ɛs siː ɑːr/
DSCR
Also known as: Debt Service Coverage Ratio, Debt Coverage Ratio, DCR
Definition
DSCR (Debt Service Coverage Ratio) measures a property's ability to generate enough income to cover its debt payments. It's the single most important metric lenders use to determine loan eligibility and sizing. A DSCR of 1.25x means the property generates 25% more income than needed to pay the mortgage—providing a cushion for vacancies, repairs, or economic downturns.
Formula
DSCR = NOI ÷ Annual Debt Service
Annual Debt Service = 12 × Monthly Principal & Interest Payment
Minimum DSCR Requirements by Loan Type
Different lenders and loan programs have varying DSCR requirements based on risk tolerance and property type:
| Loan Type | Min DSCR | Notes |
|---|---|---|
| Agency (Fannie/Freddie) | 1.20–1.25x | Multifamily only, best rates |
| CMBS | 1.25x | All property types, non-recourse |
| Bank Loans | 1.25–1.35x | Often requires recourse |
| SBA 504 | 1.15–1.25x | Owner-occupied properties |
| Bridge/Hard Money | 1.00–1.10x | Higher rates, shorter terms |
| Construction | 1.20x+ | Based on stabilized pro forma |
DSCR Calculation Example
Let's calculate DSCR for a retail property with a $3M loan at 6.5% over 25 years:
Property Financials
Loan Terms
DSCR Calculation
DSCR = $285,000 ÷ $243,036
1.17x
What this means: This property generates $285,000 in NOI but needs $243,036 to cover debt payments—leaving only $41,964 (17%) as a cushion. Most lenders would either reduce the loan amount to achieve 1.25x DSCR, require additional collateral, or decline the loan.
Understanding DSCR Scenarios
Negative Coverage
Property income doesn't cover debt payments. Owner must inject capital monthly.
- • Loan default risk
- • Covenant violations
- • Forced to sell or refinance
Thin Coverage
Property covers debt but little cushion for unexpected expenses or vacancies.
- • May qualify for bridge loans
- • Higher interest rates
- • Recourse may be required
Healthy Coverage
Strong income cushion protects against vacancy and economic downturns.
- • Qualifies for best rates
- • Non-recourse options
- • Cash reserves build up
How to Improve DSCR
Increase NOI
- • Raise rents to market rates
- • Reduce vacancy through better marketing
- • Add ancillary income (parking, storage)
- • Cut operating expenses
- • Bill back utilities to tenants
Reduce Debt Service
- • Make a larger down payment
- • Negotiate a lower interest rate
- • Extend the amortization period
- • Use interest-only period
- • Shop multiple lenders
Analyze Your Property's Cash Flow
Upload your rent roll to calculate potential NOI and understand whether your property can support the debt levels you need.