Debt Service Coverage Ratio (DSCR)

The Debt Service Coverage Ratio (DSCR) is a key financial metric used by lenders and investors to assess a borrower’s ability to meet their debt obligations. It indicates the borrower’s cash flow and their capacity to manage and repay debt.

How to Calculate the Debt Service Coverage Ratio

DSCR is typically determined by dividing the borrower’s net operating income (NOI) by their total debt service. Net operating income is the revenue generated from operations after deducting operating expenses. Total debt service includes all debt obligations, such as interest payments and principal repayments.

The formula for DSCR is:

DSCR = Net Operating Income / Total Debt Service

Debt Service Coverage Ratio Requirements

Lenders often set a minimum DSCR that borrowers must meet to qualify for a loan. A DSCR of 1.0 means the borrower’s cash flow is just enough to cover their debt obligations. A DSCR above 1.0 indicates surplus cash flow, offering a safety margin for the borrower.

Generally, a higher DSCR is seen as more favorable by lenders, as it suggests a lower risk of default and a stronger ability to meet debt payments. Lenders may establish specific DSCR requirements based on factors like the loan type, industry standards, and their risk tolerance.

It’s important to note that different lenders might use variations of the DSCR calculation and consider additional factors when evaluating a borrower’s creditworthiness.