Debt Service Coverage Calculator
Compute your Debt Service Coverage Ratio (DSCR) to see whether your property or business generates enough income to cover its debt payments. Banks require a minimum DSCR before approving commercial or investment property loans.
About this calculator
The Debt Service Coverage Ratio (DSCR) measures the cushion between income and mandatory debt payments. The formula is: DSCR = Net Operating Income / Annual Debt Service. Net Operating Income (NOI) is revenue minus operating expenses, excluding debt payments and taxes. Annual Debt Service is the total of all principal and interest payments due in a year. A DSCR of 1.0 means income exactly covers debt — no margin for error. Most commercial lenders require a DSCR of at least 1.20–1.25, meaning income must exceed debt obligations by 20–25%. A DSCR below 1.0 signals that the property or business cannot service its debt from operations alone, a major red flag for lenders.
How to use
A rental property generates $96,000 per year in rent and has $60,000 in operating expenses, yielding an NOI of $36,000. The annual mortgage payment (principal + interest) is $28,800. Step 1: DSCR = NOI / Annual Debt Service = $36,000 / $28,800 ≈ 1.25. Step 2: Interpret — a DSCR of 1.25 means the property earns $1.25 for every $1.00 of debt obligation, meeting most lenders' minimum threshold of 1.20–1.25. The investor has a 25% income buffer before cash flow turns negative.
Frequently asked questions
What DSCR do lenders typically require for a commercial real estate loan?
Most commercial lenders require a minimum DSCR of 1.20 to 1.25, meaning your net operating income must be at least 20–25% higher than your annual debt payments. Some lenders in conservative markets or for riskier asset classes require 1.35 or higher. SBA loans, for example, generally require a global DSCR of at least 1.25 when considering both business and personal debt. A higher DSCR not only helps approval but can also improve the loan's interest rate and terms.
How is net operating income calculated for DSCR purposes?
Net Operating Income (NOI) is calculated by taking gross revenue and subtracting all operating expenses — such as property management fees, maintenance, insurance, and property taxes — but excluding mortgage payments, depreciation, and income taxes. For a business, it is typically equivalent to EBIT (Earnings Before Interest and Taxes). Lenders often use a stabilized or trailing-12-month NOI to smooth out seasonal fluctuations. Inflating NOI by omitting legitimate expenses is a common underwriting mistake that leads to DSCR overestimates.
What happens if my DSCR falls below 1.0?
A DSCR below 1.0 means your income is insufficient to cover debt payments, which is a significant warning sign for both lenders and borrowers. Lenders will typically deny new loan applications with a sub-1.0 DSCR, and existing loan covenants may trigger technical defaults if DSCR drops below a specified floor. Practically, you would need to inject personal capital, sell assets, renegotiate debt terms, or increase revenue to restore coverage. Sustained DSCR below 1.0 often precedes loan default or foreclosure proceedings.