Definition
The Debt Service Coverage Ratio (DSCR) is a financial metric used by lenders to determine whether an investment property generates enough income to cover its debt obligations. It measures the relationship between Net Operating Income (NOI) and total debt payments, helping lenders assess the risk level of a loan.
Explanation
A higher DSCR means the property produces more than enough income to cover loan payments, while a lower DSCR indicates a higher financial risk.
Formula for DSCR:
DSCR = Net Operating Income (NOI) / Total Debt Payments
Where:
- Net Operating Income (NOI) = Total rental income – Operating expenses (excluding loan payments).
- Total Debt Payments = Annual mortgage principal and interest payments.
DSCR Benchmarks for Loan Approval:
| DSCR Value | Loan Approval Likelihood | Risk Level |
|---|---|---|
| 1.25+ | Strong approval chance | Low risk |
| 1.0 – 1.24 | Borderline approval | Moderate risk |
| <1.0 | High rejection risk | High risk (property doesn’t generate enough income to cover debt) |
Example Calculation
An investor owns a rental property generating $60,000 NOI per year. Their annual mortgage payments total $45,000.
DSCR = 60,000 / 45,000 = 1.33
Since 1.33 is above 1.25, lenders would likely approve financing because the property generates 33% more income than the required loan payments.
How DSCR Affects Real Estate Investing:
✅ Higher DSCR = Easier loan approval & better interest rates.
❌ Lower DSCR = Harder financing & higher risk to lenders.
💡 Lenders often require DSCR ≥ 1.2 for investment property loans.