DSCR Calculator: Debt Service Coverage Ratio for Commercial Loans
Published on October 25, 2025 | 6 min read
When you apply for a commercial real estate loan, lenders will scrutinize your deal from every angle. Of all the metrics they analyze, the Debt Service Coverage Ratio (DSCR) is arguably the most important. It's the primary measure lenders use to determine if a property can generate enough income to safely cover its mortgage payments. Understanding DSCR is essential for getting your loan approved. This guide explains the DSCR formula, what lenders look for, and how you can improve your ratio.
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What is Debt Service Coverage Ratio (DSCR)?
DSCR is a ratio that compares a property's Net Operating Income (NOI) to its total annual debt service (the total of all principal and interest payments for the year). It's expressed as a multiplier (e.g., 1.25x), which tells a lender how many times the property's income can "cover" the mortgage payment.
DSCR = Net Operating Income / Annual Debt Service
A DSCR of 1.0x means the NOI is exactly equal to the debt service, leaving zero room for error. Lenders require a DSCR greater than 1.0x to ensure there is a cash cushion in case of unexpected vacancies or expenses. To calculate your NOI accurately, you can use our NOI Builder.
Minimum DSCR Requirements: The Magic Number is 1.25x
While requirements vary by lender and property type, the industry standard minimum DSCR for most commercial loans is 1.25x. This means the property must generate 25% more income than is needed to pay the mortgage. This 25% surplus acts as a safety buffer for the lender.
💡 PRO TIP: DSCR Thresholds
- Below 1.20x: Unlikely to be approved by most traditional lenders.
- 1.25x: The minimum threshold for approval at most banks and CMBS lenders.
- 1.35x+: A strong DSCR that will likely qualify you for more favorable loan terms, such as a lower interest rate.
- 1.50x+: An excellent DSCR, indicating a very low-risk loan for the lender.
For more details on specific lender expectations, see our guide on DSCR requirements for lenders. Also learn about debt yield vs DSCR to understand both risk metrics lenders use.
| Lender Type | Minimum DSCR | Competitive DSCR |
|---|---|---|
| Commercial Bank | 1.25x | 1.35x+ |
| CMBS Lender | 1.25x - 1.30x | 1.40x+ |
| Life Insurance Co. | 1.30x | 1.45x+ |
| Credit Union | 1.20x | 1.30x+ |
Step-by-Step DSCR Calculation
Let's calculate the DSCR for an office building:
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- Net Operating Income (NOI): $110,000
- Annual Debt Service: $85,000
Apply the DSCR Formula:
$110,000 (NOI) / $85,000 (Debt Service) = 1.294
The DSCR is 1.29x. This meets the minimum 1.25x requirement and would likely be approved, though it may not receive the most competitive interest rate.
How to Improve Your DSCR
If your DSCR is below the lender's minimum, you have a few options to improve it before reapplying:
- Increase Net Operating Income: The most direct way is to boost the property's profitability. This can be done by raising rents, filling vacancies, adding new income streams (like paid parking), or reducing operating expenses.
- Decrease the Loan Amount: By making a larger down payment, you reduce the total amount you need to borrow. A smaller loan means smaller annual debt service, which directly increases your DSCR.
- Negotiate Loan Terms: A lower interest rate or a longer amortization period (e.g., 30 years instead of 25) will reduce your annual debt service payment, thus improving your DSCR.
Mastering DSCR is a key step towards becoming a sophisticated real estate investor. By understanding what lenders are looking for and how to present your property's financials in the best possible light, you significantly increase your chances of securing the financing you need to grow your portfolio.
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