What it is
The debt service coverage ratio compares the cash a property produces to the loan payments it has to make. A DSCR of 1.00x means the property earns exactly enough to pay the lender and nothing more. Above 1.00x there is a cushion. Below it, the sponsor is paying the loan out of pocket.
It is the single most common test a commercial real estate lender runs. Banks, life companies, CMBS lenders and the agencies all use it, though each defines the inputs a little differently.
How it's calculated
Take net operating income and divide it by annual debt service: principal plus interest for twelve months.
| Input | Amount |
|---|---|
| Net operating income | $1,200,000 |
| Loan amount | $10,000,000 |
| Rate / amortization | 6.00% / 30 years |
| Annual debt service | $719,460 |
| DSCR | 1.67x |
If the same loan were interest-only, annual debt service would be $600,000 and the DSCR would read 2.00x. That gap is why lenders ask which payment you used.
You can run your own numbers with the DSCR calculator.
How lenders use it
Most lenders set a minimum DSCR and size the loan so the deal clears it. Minimums commonly fall somewhere between 1.20x and 1.50x, and they vary by lender, asset class, market and loan type. Hospitality and other operating businesses usually need more coverage than stabilized multifamily.
Lenders also tend to calculate DSCR on their own version of NOI, not yours. They apply their vacancy factor, a management fee, and often replacement reserves. Some stress the rate, testing coverage at a rate above the note rate or on an amortizing payment even when the loan is interest-only.
DSCR is one of the constraints in loan sizing. If it binds, the loan gets smaller until coverage hits the minimum.
Common mistakes
- Using pro forma NOI. A pro forma number shows what the property could earn. Permanent lenders mostly underwrite what it earns today, from the T-12 and rent roll.
- Quoting interest-only coverage. Present the amortizing figure too, or the lender will do it for you and the number will drop.
- Ignoring reserves and management fees. A self-managed property still gets a management fee in underwriting.
- Pitching lenders whose minimum you miss. A 1.18x deal sent to a lender with a 1.30x floor wastes a week for both sides.
Why it matters in the package
Lead with an honest, lender-style DSCR and show the math. A reviewer who can reconcile your coverage to the T-12 in two minutes keeps reading. Dori scores each deal's DSCR against every lender's minimum and flags the ones it fails, so you can see the misses before you send. See how that works in lender matching.