Debt Service Coverage Ratio
The Debt Service Coverage Ratio (DSCR) measures an income-producing property's ability to cover its debt obligations by dividing net operating income by total annual debt service (principal and interest).
The DSCR is the primary sizing metric for commercial real estate loans in the United States. It tells lenders how many times over a property's net operating income covers its annual mortgage payments. A DSCR of 1.25x means the property generates $1.25 of NOI for every $1.00 of debt service — a 25% cushion.
Most commercial real estate lenders require a minimum DSCR of 1.20x to 1.30x at origination. The specific threshold varies by property type and lender risk appetite: multifamily loans backed by Fannie Mae or Freddie Mac often require a 1.25x DSCR; hospitality and retail loans may require 1.40x or higher given their income volatility. A DSCR below 1.0x means the property does not generate enough income to cover its debt payments, which is a severe underwriting concern.
The DSCR works in conjunction with the LTV to determine loan sizing. A lender will calculate the maximum loan supportable by both constraints and use the more restrictive one. In high-value markets where properties are priced at low cap rates, the DSCR constraint often binds before the LTV limit — meaning income production, not collateral value, limits how much can be borrowed.
For DSCR calculation purposes, lenders typically use a stressed NOI that incorporates a vacancy allowance and normalized expenses rather than actual trailing income, which may include non-recurring items. They also use a debt constant that may differ from the actual debt service if they are qualifying based on a stressed interest rate or amortization scenario.
DSCR is tracked by lenders throughout the loan term. Many commercial mortgage agreements include DSCR covenants that, if breached, trigger cash management provisions or lender consent requirements for property dispositions.