Debt Service Coverage Ratio (DSCR)

DSCR measures a property's ability to cover its annual debt payments using its net operating income. It is calculated by dividing NOI by annual debt service (principal and interest). Program floors commonly sit between 1.15x and 1.25x: Freddie Mac's fixed-rate multifamily program requires 1.25x on an amortizing loan (term sheet, April 2026) and HUD's 221(d)(4) program 1.15x for market-rate projects (Mortgagee Letter 2026-1), so income must exceed the payment by that margin as a cushion against vacancy or expense spikes.

Formula: DSCR = Net Operating Income ÷ Annual Debt Service

DSCR is the single most important underwriting metric in commercial and investor real estate lending because it directly answers the lender's core question: does the property's own cash flow cover the loan payment? Unlike residential mortgages, which underwrite primarily to the borrower's personal income, most commercial and DSCR-loan products underwrite to the asset itself.

Lenders calculate NOI by taking gross rental income, subtracting vacancy loss, and subtracting operating expenses (taxes, insurance, repairs, management fees) — but NOT subtracting debt service, depreciation, or capital expenditures. That NOI figure is then divided by the annual debt service, which includes both principal and interest on the proposed loan.

A DSCR below 1.0x means the property loses money every month before any owner distribution is possible; a DSCR of 1.0x means the property exactly breaks even on debt payments with zero cushion. Because of this, banks, agency lenders (Fannie Mae/Freddie Mac), and DSCR-loan programs for one-to-four unit and small multifamily rentals typically set minimums between 1.15x and 1.35x depending on property type, loan size, and market. Bridge and value-add lenders sometimes accept lower in-place DSCR if a clear stabilization plan exists, but permanent takeout financing almost always requires the loan to clear the standard threshold on trailing or pro forma numbers.

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