Debt Service Coverage Ratio (DSCR)
The debt service coverage ratio (DSCR) is a property's annual net operating income divided by its annual loan payments of principal and interest. It shows how many times the property's income covers its debt, and lenders use it to decide how large a loan the property can safely support.
How to calculate DSCR
DSCR = Net operating income ÷ Annual debt service
Example: A property earns $1,250,000 in net operating income, and its loan payments total $1,000,000 a year. Its DSCR is $1,250,000 ÷ $1,000,000, or 1.25x, which means income covers the loan payments with a 25 percent cushion.
Why DSCR matters
DSCR is one of the main loan sizing tests in commercial real estate. A ratio above 1.0x means the property earns more than it needs to make its payments. Lenders set a minimum above 1.0x so the loan can absorb a drop in income without missed payments.
Because debt service depends on the interest rate and amortization, DSCR moves when those terms change. A higher rate lowers DSCR and reduces the loan a property can support, which is why rising rates shrink loan proceeds even when income is unchanged.
After closing, DSCR becomes a covenant. Lenders test it on a regular schedule, and a drop below the required level can trigger a cash sweep or other protections.
DSCR vs. Debt Yield
DSCR divides net operating income by annual loan payments, so it changes with the interest rate and amortization. Debt yield divides the same income by the loan amount, so it ignores loan terms entirely. Lenders often use both, and whichever produces the smaller loan sets the limit.
Where it matters by property type
Required DSCR levels differ by property type and loan program. The multifamily underwriting page covers the agency lending requirements.
How Smart Capital Center handles DSCR
Smart Capital Center's AI agents calculate DSCR in the underwriting model at closing and test it against the covenant every time new operating statements arrive, flagging loans that are drifting toward the threshold.
Frequently asked questions
What is a good DSCR for a commercial real estate loan?
Lenders set minimums by property type, loan program and risk, and stabilized properties generally qualify at lower minimums than transitional or higher-risk properties. The exact requirement is in each lender's term sheet or credit policy, and it is often tested again after closing as a covenant.
What happens if DSCR falls below 1.0x?
A DSCR below 1.0x means the property's income does not cover its loan payments, so the borrower must fund the shortfall from other sources. Under most loan agreements, the loan would already have breached its DSCR covenant, which allows the lender to impose a cash sweep, require reserves or begin workout discussions.
Does DSCR use interest-only or amortizing payments?
It depends on the loan. For an interest-only loan, debt service includes only interest during the interest-only period. Many lenders also calculate DSCR on an amortizing basis to see how the loan performs once principal payments begin, and they may size the loan on the lower of the two results.