| Detail | Explanation |
|---|---|
| Formula | Net operating income divided by annual debt service |
| Expressed as | A multiple, such as 1.16x |
| Changes with | Income, interest rate, amortization, and loan amount |
| Used by | Banks, agency lenders, life companies, CMBS lenders, and debt funds |
| Related tests | Loan-to-value and debt yield |
How do you calculate DSCR?
Start with net operating income, the property's income after vacancy and operating expenses. Divide it by annual debt service, which is 12 months of principal and interest on the proposed loan. A result above 1 means the property earns more than the payment. A result below 1 means the owner would have to cover the gap from outside cash.
Because debt service depends on the rate and the amortization schedule, the same building can show different coverage under different loan quotes. That is why sponsors should run each term sheet through the DSCR calculator instead of relying on a single number.
DSCR = net operating income / annual debt service
Worked example
In this hypothetical example, a property produces $650,000 of net operating income and the sponsor requests a $7,000,000 loan at 7.00% with a 30-year amortization. The table shows how coverage and maximum proceeds come out.
| Input or result | Value |
|---|---|
| Net operating income | $650,000 |
| Loan amount | $7,000,000 |
| Annual debt service at 7.00%, 30-year amortization | $558,854 |
| DSCR | 1.16x |
| Annual debt service at 7.00%, 25-year amortization | $593,695 |
| DSCR on the 25-year schedule | 1.09x |
| Largest loan at a 1.25x requirement, 30-year amortization | $6,513,328 |
What DSCR do lenders require?
Requirements differ by lender, program, property type, and leverage, so there is no universal minimum. One published benchmark comes from Freddie Mac. Its term sheet for Optigo fixed-rate multifamily loans lists a minimum amortizing debt coverage ratio of 1.25x, and it notes that adjustments may be made depending on the property, product, or market.
Against that 1.25x requirement, the hypothetical property above falls short at the requested amount. Holding income, rate, and amortization constant, debt service could be no more than $520,000, which supports a loan of about $6,513,328. Transitional, single-tenant, and specialized assets often face stricter coverage tests than stabilized apartments.
Does an interest-only period improve DSCR?
On paper it does. Interest only on the hypothetical $7,000,000 loan costs $490,000 a year, which lifts coverage to 1.33x. Many lenders size the loan on an amortizing payment anyway. Freddie Mac's fixed-rate term sheet states that the coverage ratio for partial and full-term interest-only loans uses an amortizing payment, so an interest-only period does not by itself raise proceeds under that program.
How to improve coverage on a real deal
If coverage is what stands between your property and the loan you need, submit the deal and Capital Partners will review which lenders' coverage tests fit it.
- Request a lower loan amount and fill the gap with mezzanine debt or preferred equity
- Ask for a longer amortization, which lowers the annual payment
- Document income the lender may be discounting, such as signed leases not yet in the trailing 12 months
- Use a bridge loan sized to the business plan, then refinance after income stabilizes
- Compare lenders whose coverage requirements fit the asset type
Sources
Common questions
Is a DSCR of 1.2 good for a commercial loan?
It means income exceeds the payment by 20 cents on every dollar. Whether that qualifies depends on the lender and program. Some published programs, including Freddie Mac's Optigo fixed-rate loans, list a higher minimum, so a 1.2 ratio could reduce proceeds there.
What happens if my DSCR is below the lender's minimum?
The lender usually cuts the loan amount until coverage meets its test, rather than declining the deal outright. The sponsor then has to bring more equity, add subordinate capital, or find a lender whose requirement fits the property.
Is DSCR calculated on actual or underwritten income?
Lenders use their own underwritten net operating income. It often includes a vacancy factor, a management fee, and replacement reserves even when the owner's statements do not, so lender DSCR can run lower than the sponsor's figure.
What is the difference between DSCR and debt yield?
DSCR uses the loan payment, so the rate and amortization change it. Debt yield divides income by the loan amount alone and ignores the payment. Many lenders apply both tests and lend the lower result.
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