When you apply for an investment property loan, lenders don't just look at your personal income—they look at whether the property itself can cover the debt payments. That's where DSCR comes in.

DSCR (Debt Service Coverage Ratio) is how lenders measure a property's ability to pay its mortgage. Understanding this metric helps you qualify for better loans and evaluate deals more accurately.

What is DSCR?

DSCR measures how many times a property's net operating income (NOI) can cover its annual debt payments.

DSCR = Net Operating Income ÷ Annual Debt Service

A DSCR of 1.25 means the property generates 25% more income than needed to cover the mortgage. A DSCR of 1.0 means income exactly equals debt payments—no margin for error.

The DSCR Formula

DSCR = NOI ÷ Annual Debt Service

Where:

• NOI = Annual rental income minus operating expenses (before mortgage)
• Annual Debt Service = Total mortgage payments for the year (principal + interest)

Example Calculation

Property:

• Annual gross rent: $72,000
• Vacancy (5%): -$3,600
• Operating expenses: -$25,200
• NOI: $43,200

Loan:

• Loan amount: $400,000
• Interest rate: 7%
• Term: 30 years
• Monthly payment: $2,661
• Annual debt service: $31,932

DSCR = $43,200 ÷ $31,932 = 1.35

This property generates 35% more income than needed to cover the mortgage—a healthy cushion.

What DSCR Lenders Require

Different loan types have different DSCR requirements:

Most lenders want DSCR of at least 1.20-1.25. Below 1.0 means the property doesn't cover its debt—almost impossible to finance.

Why DSCR Matters to Lenders

Lenders use DSCR to assess risk:

• DSCR > 1.25: Comfortable cushion. Property can handle vacancy, rent drops, or expense increases.
• DSCR 1.10-1.25: Acceptable but thin margin. Minor issues could stress cash flow.
• DSCR 1.00-1.10: Break-even territory. Any problem means negative cash flow.
• DSCR < 1.00: Property loses money. High default risk.

The higher the DSCR, the lower the risk—and often, the better the loan terms.

How to Improve Your DSCR

If your DSCR is below lender requirements, you have options:

Increase NOI

Raise rents:

Every dollar of rent increase flows directly to NOI and improves DSCR.

Reduce vacancy:

Better marketing, tenant retention, or property improvements.

Add income streams:

Parking fees, laundry, storage, pet rent.

Cut operating expenses:

Shop insurance, appeal taxes, self-manage if appropriate.

Reduce Debt Service

Larger down payment:

Less loan = lower payments = higher DSCR.

Lower interest rate:

Shop multiple lenders, improve credit, buy down points.

Longer loan term:

30-year amortization has lower payments than 20-year.

Key Takeaways

• DSCR = NOI ÷ Annual Debt Service
• Measures property's ability to cover mortgage payments
• Most lenders require 1.20-1.25 minimum
• DSCR loans qualify you based on property, not personal income
• Improve DSCR by increasing NOI or reducing debt service
• Commercial loans rely heavily on DSCR for underwriting
• Stress test your DSCR for realistic risk assessment

DSCR is how lenders see your deal. Even if a property looks profitable to you, if DSCR is below threshold, you won't get the loan. Master this metric to structure deals that actually close.