The debt service coverage ratio (DSCR) tells a lender whether a property or business earns enough to pay its loan. If you are applying for a commercial, rental or small business loan, this is one of the first numbers they check. This guide shows the formula, a worked example and what to do if your ratio is too low.
The DSCR formula
DSCR = Net operating income / Annual debt service
- Net operating income (NOI): income after vacancy and operating costs (taxes, insurance, repairs, management, utilities), before loan payments.
- Annual debt service: all loan payments for the year, principal and interest.
A DSCR of 1.0 means income exactly covers the payments. Lenders want a cushion above that. 1.25 is a commonly quoted benchmark, but each lender and loan type sets its own minimum, so ask yours.
Worked example
| Step | Amount |
|---|---|
| Gross income | $150,000 |
| Vacancy allowance 5% | -$7,500 |
| Operating costs | -$38,500 |
| Net operating income | $104,000 |
| Loan: $1,000,000 at 7%, 25-year amortization | Payments $84,814 per year |
| DSCR: $104,000 / $84,814 | 1.23 |
With a 1.25 minimum this loan falls just short. The maximum loan that works at 1.25 is about $980,976, and the NOI would need to be about $2,017 higher to pass at the full amount. All numbers here are examples.
How rate changes the result
The same loan at 5% gives about 1.48 and at 10% about 0.95. Interest rate matters as much as income, so test several rates before you apply.
How to improve a low DSCR
- Raise income: rents, fees or pricing.
- Cut operating costs you can control.
- Borrow less or put more down.
- Choose a longer amortization to lower yearly payments.
- Ask about a lower rate or a different loan product.
Things to check with your lender
Lenders differ on how they treat vacancy, management fees and one-time costs, and some use global cash flow instead. Use the calculation here for planning and confirm the exact method with your lender.
For a quick online version see our DSCR loan calculator.
Want it in Excel? The Markup, Margin & DSCR Workbook ($15) includes this calculator with pass or fail, maximum loan and a rate table.
This article is general information, not financial or lending advice.
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