DSCR (Debt Service Coverage Ratio)
A lending ratio that compares a property's or business's net operating income with its annual loan payments, showing how well income covers debt.
What DSCR is
The debt service coverage ratio (DSCR) is a measure of whether a borrower's income can pay its debts. It divides net operating income by debt service, the principal and interest due over the same period. Lenders use it to size and approve commercial real estate loans and many business loans.
How it works
Take the income left after operating expenses, then divide it by the year's loan payments. A ratio of 1.25x means income covers payments with 25% to spare. Lenders often test it at underwriting and again through covenants for the life of the loan.
- 01 · MEASURE Find net operating income: revenue minus operating costs, before debt payments and income taxes.
- 02 · DIVIDE Divide that income by annual debt service: all principal and interest due in the year.
- 03 · COMPARE Check the result against the lender's minimum, set in its credit policy.
| DSCR | What it means | Example |
|---|---|---|
| Below 1.00x | Income does not cover the payments | $90,000 ÷ $100,000 = 0.90x |
| 1.00x | Income exactly covers the payments | $100,000 ÷ $100,000 = 1.00x |
| Above 1.00x | Income covers the payments with room to spare | $125,000 ÷ $100,000 = 1.25x |
Examples assume $100,000 of annual debt service; each lender sets its own minimum ratio.
When businesses use it
- Underwriting loans on apartment, office, retail and industrial properties
- Investor loans on rental homes that qualify on property income, often called DSCR loans
- Small business loans, where lenders check cash flow against payments
- Covenants in bank and private credit loans that set a minimum ratio
Cross River originates and services commercial real estate loans secured by investment properties, from multifamily and mixed-use buildings to office, retail and industrial. It lends in New York, New Jersey, Connecticut and parts of Pennsylvania. See commercial real estate lending at Cross River.