Debt Service Coverage Ratio (DSCR)

Debt service coverage ratio divides net operating income by annual debt service; lenders use it to see how many times a property's income covers the loan payments. Commercial lenders require 1.20 to 1.25. It shares NOI with cap rate, and the spread between cap rate and mortgage constant decides whether it clears.

DSCR equals cap rate divided by mortgage constant, times the inverse of the loan-to-value. At 75% LTV, a 6% cap rate against an 8.2% constant gives a DSCR near 0.98: the property barely covers its debt. At 60% LTV the same property scores about 1.22.

That relationship is how lenders size loans. They lend the lesser of the LTV cap and the loan amount at which DSCR hits their minimum. In a low cap rate market the DSCR constraint binds first and buyers must put more down. For one to four unit rentals, residential DSCR lenders use a simpler form, gross rent over the full monthly payment, which yields a higher ratio on the same property.