What Is the Debt Service Coverage Ratio?

The Debt Service Coverage Ratio (DSCR) measures whether a property’s net operating income (NOI) is sufficient to cover its annual mortgage payments. DSCR is a critical part of the real estate investment analysis process — it is the primary metric lenders use to approve or deny investment property loans. A DSCR of 1.25x means the property generates 25% more income than needed to service the debt. Unlike cap rate (which ignores financing) or cash-on-cash return (which measures investor yield), DSCR directly answers: can this property pay its mortgage?

DSCR Tier System and Lender Requirements

Lenders segment DSCR into qualification tiers, each with different loan terms and availability:

• Below 0.75x — Hard money or bridge financing only. Property cannot service debt; lender relies on asset value and borrower net worth.
• 0.75-1.0x — DSCR loan programs with compensating factors (high credit score, significant reserves, low LTV). Rate premiums of 1-2%.
• 1.0-1.25x — Meets minimum requirements for most DSCR loan programs. Standard pricing with moderate documentation.
• 1.25-1.50x — Standard threshold for Fannie Mae and Freddie Mac multifamily programs (Fannie Mae Multifamily Selling Guide). Best conventional terms.
• Above 1.50x — Premium qualification. Lowest rates, highest LTV, minimal reserves required.

The DSCR Formula

DSCR = NOI / Annual Debt Service. NOI is calculated as effective gross income minus operating expenses and property management — see our cap rate calculator methodology for the complete NOI formula. Annual debt service is the total of 12 monthly mortgage payments (P&I only, not taxes/insurance which are already in operating expenses). The breakeven occupancy metric shows what percentage of gross rent is needed to cover all expenses and debt service — anything above 90% signals high risk.

How to Use This Calculator

1. Purchase Price — Enter the property’s acquisition price. This determines the loan amount based on your down payment.
2. Monthly Rental Income — Enter gross monthly rent from all units at full occupancy. Use current market rents, not in-place rents if tenants are under-market.
3. Vacancy Rate — Expected vacancy as a percentage. DSCR lenders commonly underwrite at 5-7% vacancy regardless of actual occupancy. Use the lender’s assumption for loan qualification purposes.
4. Annual Operating Expenses — All recurring property costs: taxes, insurance, maintenance, repairs, utilities, landscaping. Exclude mortgage payments and property management (entered separately).
5. Down Payment (%) — Minimum 5% for DSCR loans (most require 20-25%). Higher down payment reduces the loan amount, improving DSCR. Adjusting this slider shows how leverage affects qualification.
6. Interest Rate — Annual mortgage rate. DSCR loans typically carry 0.5-1.5% premium over conventional rates. Use the rate quoted by your lender.
7. Loan Term — Usually 30 years for maximum DSCR (lower annual payments). Some commercial loans use 25-year amortization.
8. Property Management Fee — Percentage of effective gross income paid to management. DSCR lenders typically require a management fee in underwriting (usually 6-10%) even if you self-manage.

The calculator shows your DSCR ratio, NOI, annual debt service, and breakeven occupancy. If DSCR is below your lender’s threshold, try increasing the down payment or finding ways to increase rent before resubmitting.