DSCR: Debt Service Coverage Ratio

What is DSCR: Debt Service Coverage Ratio? 

What is DSCR

The debt service coverage ratio (DSCR) compares a property's net operating income (NOI) to the debt service on an annual basis. Lenders use the DSCR to determine the maximum loan amount, a borrower's ability to repay, and whether a property can sustain the proposed debt. It's important to understand DSCR if you are considering a new commercial loan or refinancing.

Calculating DSCR

The debt service coverage ratio is calculated by taking the property's annual net operating income and dividing it by the property's annual debt payments.

DSCR = Net Operating Income / Annual Debt Service

For example, if you're looking at purchasing a commercial building that produces $600,000 in net operating income and the debt service is $500,000 a year, the DSCR would be 1.2. A DSCR of 1.2, means that the property can cover its debt 1.2 times in a given year. A DSCR of 1.0 indicates that the property’s net operating income exactly equals the annual debt service. A DSCR less than 1.0, indicates that the property doesn't have enough income to support its annual debt service. The higher the DSCR, the safer the loan as the NOI is higher in proportion to the debt service.

What is the preferred DSCR?

The minimum DSCR varies by lender and property type, but in general, most lenders look for a minimum DSCR of 1.25. This means that the property can at least produce an additional 25% of income after paying all mortgage debts.

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