Debt Service Coverage Ratio (DSCR): What Does It Mean?

The Debt Service Coverage Ratio (DSCR) measures the income a property or business generates relative to its debt obligations. It is calculated by dividing Net Operating Income (NOI) by total debt service, which includes both principal and interest payments. A DSCR of 1.0 means the income exactly covers the debt; however, lenders typically require a ratio of 1.25 or higher to ensure a comfortable safety cushion.

Real estate investors and small business owners encounter DSCR most often when applying for commercial or investment property loans, as lenders use it to evaluate whether the income from the asset is sufficient to cover the mortgage. A higher DSCR signals a lower risk of default and a stronger loan application.