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.