What Is DSCR (Debt Service Coverage Ratio)?

Debt Service Coverage Ratio (DSCR) is a financial metric that measures whether a commercial property generates enough income to cover its loan payments. Calculated by dividing Net Operating Income (NOI) by annual debt service, DSCR tells lenders how much cushion exists between what a property earns and what it owes. A DSCR of 1.25x, for example, means the property produces 25% more income than needed to make its debt payments. It is the single most important number in commercial real estate underwriting, and the one lenders look at first.

DSCR Definition

DSCR answers a straightforward question: for every dollar a property owes in debt payments, how many dollars does it earn? A ratio above 1.0x means the property covers its debt. A ratio below 1.0x means it does not.

Lenders use DSCR to assess risk. The higher the ratio, the more room there is to absorb a drop in income or a spike in expenses without missing a payment. It is not just a pass/fail threshold. DSCR directly affects how much a borrower can borrow, what rate they get, and what terms are on the table.

The DSCR Formula

Two components drive the calculation.

Net Operating Income (NOI)

NOI is the property's gross rental income minus operating expenses. Operating expenses include property taxes, insurance, property management fees, maintenance, and utilities. NOI does not include debt service payments, depreciation, capital expenditures, or income taxes. It represents the cash the property generates from operations before any financing costs.

Annual Debt Service

Annual debt service is the total of all loan payments (principal and interest) for the year. If a property has multiple loans, all debt payments are typically included in the calculation. The debt service amount depends on the loan amount, interest rate, and amortization schedule.

Worked Example

A retail property generates $800,000 in gross rental income. After subtracting $310,000 in operating expenses, the NOI is $490,000. The annual debt service on the property's mortgage is $392,000.

This means the property earns $1.25 for every $1.00 it owes in debt payments. That 25-cent cushion is what protects the lender. Use the DSCR calculator to run your own numbers instantly.

How DSCR Is Used in CRE Underwriting

DSCR is the first metric most lenders evaluate when underwriting a commercial real estate loan. It serves two purposes: qualifying the deal and sizing the loan.

When qualifying, lenders compare the property's DSCR against their minimum threshold. If the ratio falls below their floor, the deal does not move forward at those terms.

When sizing the loan, lenders work backward from their DSCR requirement. They take the property's NOI, divide it by their minimum DSCR, and the result is the maximum annual debt service they will allow. From there, they calculate the maximum loan amount. This is why a lower DSCR requirement from a lender translates directly into a larger loan for the borrower.

What Lenders Look For

Different lender types have different DSCR expectations, and those expectations vary by property type, location, and market conditions. Generally, lenders with more conservative credit appetites require higher DSCRs, while more aggressive lenders may accept thinner coverage.

Agency lenders (Fannie Mae and Freddie Mac) and CMBS lenders tend to set their minimums in a defined range. Banks and credit unions may offer more flexibility, particularly for strong borrowers or well-located properties. Non-recourse loans generally require higher DSCRs than recourse loans, because the lender's only security is the property itself.

Property type matters too. Stabilized multifamily properties with predictable income streams may qualify at lower DSCRs than hospitality or retail assets where revenue can be more volatile.

DSCR vs Other Key Metrics

DSCR is the most common underwriting metric, but lenders rarely look at it in isolation. Here is how it compares to other ratios you will encounter.

DSCR is sensitive to interest rates and amortization schedules, which means the same property can have a different DSCR depending on the loan terms. Debt yield avoids this issue, which is why many CMBS lenders use both metrics together. For a deeper look at how DSCR loans work in practice, see our dedicated guide.

How Brokers Can Use DSCR Knowledge to Win Deals

Understanding DSCR is not optional for commercial mortgage brokers. It is the language lenders speak, and the better you speak it, the more deals you close.

Before you submit a deal, calculate the DSCR yourself. If it is below the target lender's minimum, do not waste time submitting. Instead, restructure: propose a smaller loan amount, suggest an interest-only period to reduce near-term debt service, or identify ways to boost NOI before the application.

When presenting to lenders, lead with the DSCR. A clean deal package that opens with a strong DSCR tells the underwriter this deal has been vetted. It sets the right tone. For tips on packaging, see the deal structuring guide.

When advising borrowers, use DSCR to set realistic expectations. If a borrower wants maximum leverage but the property's income only supports a 1.10x DSCR, you can show them exactly why the loan amount needs to come down, or why they need to improve the property's financials first.

Frequently Asked Questions