What is Debt Service Coverage Ratio (DSCR)?
Debt Service Coverage Ratio (DSCR) measures a commercial property's ability to cover its debt obligations from operating income. A DSCR of 1.25x means the property generates 25% more income than needed to service its debt. DSCR is the primary underwriting metric for commercial real estate (CRE) loans; lenders typically require a minimum of 1.20-1.25x for stabilized properties. DSCR below 1.0x means the property cannot cover its debt from operations and requires outside support.
Formula
DSCR = Net Operating Income / Annual Debt Service Where NOI = Gross Revenue - Operating Expenses (excluding debt service)
How LoanBook Uses Debt Service Coverage Ratio
LoanBook uses DSCR as a credit multiplier in the Default Model for commercial real estate loans. DSCR bands map to default multipliers: below 1.00x = 3.0x baseline CDR, 1.00-1.10x = 2.0x, 1.10-1.20x = 1.5x, 1.20-1.30x = 1.2x, 1.30-1.50x = 1.0x (baseline), 1.50x and above = 0.7x.
Frequently Asked Questions
What is a good DSCR?
For conventional CRE lending, 1.25x is the typical minimum. Agency lenders (Fannie Mae, Freddie Mac) often require 1.20-1.25x. SBA 504 loans may accept 1.15x. DSCRs above 1.50x are considered strong.
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