Full Definition
Debt Service Coverage Ratio measures a property's ability to cover its debt payments from operating income. The formula: NOI / Annual Debt Service. A DSCR of 1.25x means the property generates 25% more income than needed to cover mortgage payments. Commercial lenders use DSCR as a primary underwriting metric.
Example
A property with $150K NOI and $120K annual debt service has a DSCR of 1.25x. If the lender requires 1.30x, this deal wouldn't qualify without either more equity or a larger property NOI.
Why It Matters
DSCR drives commercial loan approval. Below-threshold DSCR is the most common reason CRE loans are declined.
Related Terms
NOI (Net Operating Income)
Annual income from a property after deducting operating expenses — before debt service, taxes, and capital expenditures.
LTV (Loan-to-Value)
Loan amount as a percentage of property value. Typical commercial LTV ranges 65-80%.
Debt Yield
NOI divided by total loan amount. A lender metric measuring loan safety independent of interest rate.