The DSCR calculator, in one line.
Debt service coverage ratio is the first number a commercial lender checks. Enter the property's net operating income and its annual debt service to see whether the cash flow covers the loan, with the cushion lenders want.
What the number means
DSCR is net operating income divided by annual debt service. A result of 1.25x means the property throws off a quarter more income than the loan payment requires. Below 1.0x, the property does not cover its own debt.
Lenders size loans to a minimum DSCR, often 1.20x to 1.30x depending on property type and risk, and frequently carry the ratio forward as an ongoing covenant tested from the borrower's financials.
Watch the inputs
The ratio is only as honest as the NOI behind it. Whether NOI is in-place or stabilized, actual or underwritten, and how it treats reserves and management fees all move the number, which is why loan agreements define the calculation precisely.
Use conservative, in-place NOI for a realistic read. Pro forma NOI can make almost any deal pencil.
A worked example
A property produces $1,000,000 of net operating income. Its loan requires $780,000 of annual principal and interest. DSCR is $1,000,000 divided by $780,000, or 1.28x. The property earns 28 percent more than the loan requires, which is the cushion a lender is looking at.
The same property with a larger loan carrying $900,000 of debt service drops to 1.11x, and most lenders would treat that as too thin for a stabilized loan. Nothing about the building changed. Only the debt did.
How lenders size a loan from DSCR
Lenders run the ratio backwards to find the largest loan the income supports. Divide NOI by the minimum DSCR to get the maximum annual debt service, then divide that by the loan's debt constant, meaning the annual payment per dollar borrowed at the rate and amortization on offer.
With $1,000,000 of NOI and a 1.25x minimum, the property can carry $800,000 a year of debt service. If the debt constant is 7.5 percent, the maximum loan is $800,000 divided by 0.075, about $10.7 million. Raise the rate and the constant rises, and the same income supports a smaller loan. That is why rate moves change loan proceeds even when the property does not change.
| Annual debt service | DSCR | Read |
|---|---|---|
| $700,000 | 1.43x | Comfortable cushion |
| $800,000 | 1.25x | A common minimum |
| $870,000 | 1.15x | Thin for stabilized property |
| $1,000,000 | 1.00x | Breaks even |
| $1,100,000 | 0.91x | Income does not cover the loan |
What people mean by a DSCR loan
In residential investment lending, a DSCR loan is a mortgage on a rental property that qualifies on the property's rent compared with its payment, rather than on the borrower's personal income. The ratio is the same idea scaled down: rent over the mortgage payment, including taxes and insurance.
Commercial lending has always worked this way. The property's income repays the loan, so the property's coverage is the first test, and in a stabilized commercial loan the borrower's personal income is secondary to it.
DSCR after closing
On many commercial loans the ratio does not stop at underwriting. A DSCR covenant requires the property to keep a minimum coverage, tested from the borrower's reported financials, often quarterly. Falling below it can trigger cash management, where the lender controls the property's cash, or a required paydown.
Which is why the definition in the loan agreement matters more than the textbook formula. The agreement says whose NOI, over what period, with which adjustments, and whether the test uses actual or hypothetical debt service.
Questions lenders ask
- What is a good DSCR for a commercial loan?
- Most lenders want at least 1.20x to 1.25x, with the exact floor depending on property type and risk. Below 1.0x the property does not cover its debt service.
- How is DSCR calculated?
- Net operating income divided by annual debt service. The tool above does the division and guards against a zero debt service input.
- How do lenders calculate the maximum loan from DSCR?
- Divide NOI by the minimum DSCR to get the most annual debt service the property can carry, then divide by the loan's debt constant. $1,000,000 of NOI at a 1.25x minimum supports $800,000 of debt service, which at a 7.5 percent constant is a loan of about $10.7 million.
- What is a DSCR loan?
- In residential investing, a mortgage on a rental property that qualifies on the property's rent relative to its payment rather than the borrower's personal income. Commercial loans have always been underwritten primarily on the property's coverage.
- What happens if DSCR falls below 1.0x?
- The property's income does not cover its debt service, so the owner has to fund the shortfall. On a loan with a DSCR covenant, a drop below the required level usually triggers cash management or a default well before 1.0x.
- Does DSCR use NOI before or after reserves?
- It depends on the loan agreement. Many lenders deduct replacement reserves, and sometimes leasing reserves, from NOI before calculating DSCR, which makes the ratio more conservative. The agreement's definition controls.
- Commercial real estate loan calculatorPayment, balloon, and how much the property supports.
- DSCR, definedThe full definition.
- Debt yield calculatorThe value-independent companion.
- Net operating income, definedThe number underneath.
- The due diligence checklist, built to be runWhere sizing meets diligence.
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