Debt Service Coverage Ratio
What Is Debt Service Coverage Ratio?
Debt Service Coverage Ratio (DSCR) measures a property’s ability to generate enough income to cover its debt payments.
It is calculated by dividing net operating income by total debt service.
Formula:
DSCR = Net Operating Income ÷ Total Annual Debt Payments
DSCR is commonly used in commercial real estate lending.
Why It Matters
Debt Service Coverage Ratio:
- Indicates loan risk
- Influences loan approval
- Determines borrowing capacity
A DSCR above 1.0 means income exceeds debt payments. Many lenders require 1.20 or higher for approval.
How Debt Service Coverage Ratio Works
Debt Service Coverage Ratio compares property income to annual principal and interest payments.
Lenders evaluate whether rental income sufficiently covers mortgage obligations.
Higher DSCR reduces lender risk and improves approval chances.
Debt Service Coverage Ratio vs. Debt-to-Income Ratio
DSCR → Property income vs. property debt
DTI → Personal income vs. personal debt
They measure different risk factors.
FAQs About DSCR
What is a good DSCR?
Many lenders prefer at least 1.20 to provide a safety cushion.
Does DSCR apply to residential loans?
Primarily used in commercial or investment property loans.
Can DSCR affect interest rates?
Higher DSCR may improve loan pricing.
Related Terms
