DSCR (Debt Service Coverage Ratio)
DSCR measures whether a property's income covers its loan payments: net operating income divided by annual debt service. A DSCR of 1.25x means income exceeds payments by 25%. Commercial lenders typically require at least 1.25x on stabilized properties and 1.10–1.20x on bridge or acquisition loans.
DSCR = Net Operating Income ÷ Annual Debt ServiceDSCR is usually the constraint that actually sizes a commercial loan. When the ratio falls below the lender's minimum, the loan amount is reduced until it clears — regardless of how much equity the property has.
Because debt service depends on rate and amortization, the same property supports a smaller loan when rates rise. Interest-only periods temporarily raise DSCR since payments exclude principal.
A property with $560,000 NOI and a loan requiring $381,000 in annual payments has a DSCR of 1.47x — comfortably above a 1.25x minimum.
Frequently asked questions
What is the difference between in-place DSCR and stabilized DSCR?
In-place DSCR uses the property's current net operating income. Stabilized DSCR uses the income projected once lease-up or renovation finishes. Permanent lenders size on in-place figures; bridge and construction lenders typically underwrite to the stabilized ratio and treat the credibility of the path to it as the real credit question.
Is a commercial DSCR requirement the same as a residential DSCR loan?
No. A residential DSCR loan is an investor product underwritten on one rental's rent against its mortgage payment, and lenders often accept a ratio at or near 1.00x. Commercial DSCR is a sizing constraint applied to the property's full operating statement — vacancy, management and reserves included — and stabilized deals typically need at least 1.25x.
Why is the lender's DSCR lower than the one I calculated?
Because lenders re-underwrite net operating income rather than accepting the owner's. They reconcile the rent roll against the trailing twelve-month statement, discount above-market or short-dated leases, apply a vacancy allowance even on a fully leased building, and add management and replacement reserves. Each adjustment lowers NOI, and DSCR falls with it.
What is a DSCR covenant?
A DSCR covenant is an ongoing test written into the loan documents and measured quarterly or annually after closing, separate from the ratio that sized the loan on day one. Falling below it is usually not an immediate default — the common first consequence is a cash sweep that traps excess cash flow until coverage recovers.
Can a DSCR loan fund a partially vacant or mixed-use property?
Partial vacancy and mixed-use income are usually what breaks a DSCR file before the ratio ever gets tested — a vacant unit has no in-place rent to measure against the payment, and many DSCR programs cap the commercial share of a building's income at a minority of the total. That is an occupancy and income-composition question, not a coverage question, so a strong DSCR on paper does not fix it. Deals like these typically route to lenders that underwrite the full operating statement instead of a fixed rent roll — portfolio banks, credit unions, debt funds and bridge lenders — the same group commercial-collateral deals fall back to more broadly.
How long is DSCR seasoning after a bridge loan?
It depends on structure. A rate-and-term DSCR refinance that merely pays off the bridge balance typically needs no seasoning period, since the bridge loan already financed the improvement costs. Pulling out additional equity turns it into a cash-out refinance, which most DSCR lenders only fund after a minimum ownership period — commonly cited around six months — plus several months of documented rental income.