What is Debt Service Coverage Ratio (DSCR)?

Q: What DSCR do lenders require?

Most commercial lenders require a minimum DSCR of 1.20 to 1.25. SBA loans typically require 1.15 to 1.25. Investment property DSCR loans may accept ratios as low as 1.0 in some cases. Higher DSCR generally means better loan terms.

Q: How do you calculate DSCR?

DSCR = Net Operating Income ÷ Total Debt Service. Net Operating Income is revenue minus operating expenses (before debt payments). Total Debt Service is all principal and interest payments due in the period.

Debt Service Coverage Ratio (DSCR) is a financial metric that measures your ability to pay debt obligations from operating income. It's calculated by dividing Net Operating Income by Total Debt Service. Lenders use DSCR to determine if you generate enough cash flow to cover loan payments. A DSCR of 1.25 means you earn 25% more than needed to service your debt.

DSCR Formula

DSCR = Net Operating Income ÷ Total Debt Service

Net Operating Income (NOI)

Revenue minus operating expenses, before debt payments and taxes

Total Debt Service

All principal + interest payments due in the period

Example DSCR Calculation

Annual Revenue $500,000

Operating Expenses - $350,000

Net Operating Income $150,000

Annual Debt Payments (P+I) $120,000

DSCR 1.25x

$150,000 ÷ $120,000 = 1.25 — This borrower has 25% cushion above their debt payments.

What DSCR Do Lenders Require?

Commercial Real Estate

Banks and institutional lenders

1.25x+

SBA Loans

7(a) and 504 programs

1.15-1.25x

DSCR Investment Loans

Rental property financing

1.0-1.25x

Business Term Loans

Traditional bank financing

1.20x+

What Affects Your DSCR?

Improves DSCR

• Higher revenue
• Lower operating expenses
• Longer loan term (lower payments)
• Lower interest rate
• Larger down payment

Hurts DSCR

• Lower revenue / high vacancy
• Higher operating costs
• Shorter loan term
• Higher interest rate
• Additional debt

DSCR Benchmarks

< 1.0 Negative cash flow. Cannot cover debt payments from operations.
1.0 Break-even. Just enough income to cover debt. High risk.
1.25 Good. 25% cushion. Meets most lender requirements.
1.5+ Strong. 50%+ cushion. May qualify for better terms.

Documents Needed for DSCR Analysis

Income Statement (P&L)

Shows revenue and operating expenses to calculate NOI

Debt Schedule

Lists all debt payments to calculate total debt service

Prepare Your Loan Documents

Create the financial statements lenders need to analyze your DSCR.

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