What Is DSCR (Debt Service Coverage Ratio)?
DSCR = net operating income ÷ annual debt service. A ratio of 1.0x means income exactly covers loan payments; many lenders look for around 1.20x to 1.25x or more, though each lender sets its own threshold.
Example: $150,000 NOI and $110,000 of annual loan payments give a DSCR of 1.36x.
The debt service coverage ratio shows how comfortably a business, or a rental property, can pay its loans from operating income.
The formula
How to read it
| DSCR | Meaning |
|---|---|
| Below 1.0x | Income does not cover the loan payments |
| 1.0x | Income exactly covers payments, with no cushion |
| 1.25x | 25% more income than needed, a common lender benchmark |
| 2.0x | Income is double the payments |
Worked example
A business has $150,000 of net operating income. It wants a $500,000 loan at 8% over 7 years, a payment of about $7,793 a month or $93,517 a year, and already pays $16,500 a year on equipment finance. Total debt service is $110,017, so DSCR = 150,000 ÷ 110,017 ≈ 1.36x.
To find the largest annual payment a 1.25x target allows: 150,000 ÷ 1.25 = $120,000 of total debt service.
DSCR for a rental property
Lenders that offer "DSCR loans" for investment property use the rent instead of the borrower's personal income. NOI is the rent collected minus operating costs such as property tax, insurance, repairs, management and an allowance for vacancy. Mortgage payments are left out because they are the debt service.
Example: a rental produces $42,000 of NOI a year. A $400,000 mortgage at 7% over 30 years costs $2,661.21 a month, or $31,934.52 a year. DSCR = 42,000 ÷ 31,934.52 ≈ 1.32×. Some lenders calculate this with the monthly payment including taxes and insurance (PITI), so ask which method they use.
Working backwards to a loan size
- Divide NOI by the lender's target DSCR to get the maximum annual debt service.
- Divide by 12 for the maximum monthly payment.
- Use a loan calculator to find the loan amount that payment supports at the quoted rate and term.
With $100,000 NOI and a 1.25× target, the maximum is $80,000 a year. At 8% over 10 years that supports about $549,477.
Common mistakes
- Using revenue instead of net operating income.
- Leaving out existing loans, leases or owner draws the lender counts.
- Using interest only when the loan also repays principal.
Try it
The Talreon business loan & DSCR calculator works out the payment and ratio for your figures.
Frequently asked questions
What is a good DSCR?
Many lenders look for about 1.20x to 1.25x or higher, but requirements vary by lender and loan type.
What does a DSCR below 1 mean?
Operating income is not enough to cover the loan payments.
Is DSCR calculated on revenue or profit?
On net operating income: revenue minus operating expenses, before debt payments.
What is a DSCR loan?
In US real estate, a DSCR loan is an investment-property mortgage approved mainly on the property’s rental income compared with its payment, rather than on the borrower’s personal income. Terms and minimum ratios vary by lender.
Is DSCR the same as debt-to-income (DTI)?
No. DSCR compares a business or property’s operating income with its loan payments; higher is better. DTI compares a person’s monthly debt payments with gross monthly income; lower is better. See the debt-to-income calculator.
Sources
- OCC Comptroller's Handbook: Commercial Real Estate Lending (covers debt service coverage)
- CFPB: what is a debt-to-income ratio?
- U.S. Small Business Administration: loans
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