What is DSCR?
The Debt Service Coverage Ratio (DSCR) measures a property's ability to cover its mortgage payments from its operating income. It's one of the most critical metrics lenders use to evaluate commercial real estate loans.
A DSCR of 1.0x means the property's income exactly covers the debt payments. Most lenders require a DSCR of at least 1.20x to 1.25x, providing a cushion for potential income fluctuations.
Why DSCR Matters
Lenders and investors use DSCR to:
- Qualify for financing — Most lenders have minimum DSCR requirements
- Determine loan amount — Higher DSCR may qualify for larger loans
- Assess risk — Lower DSCR indicates higher default risk
- Compare deals — Evaluate multiple investments on the same basis
Typical DSCR Requirements by Loan Type
| Loan Type | Minimum DSCR |
|---|---|
| Agency (Fannie/Freddie) | 1.20x - 1.25x |
| CMBS | 1.25x - 1.35x |
| Bank/Credit Union | 1.20x - 1.30x |
| Bridge Loans | 1.10x - 1.20x |
| DSCR Loans (Investor) | 1.00x - 1.25x |
| SBA 504 | 1.15x - 1.25x |
How to Improve Your DSCR
If your DSCR is too low for financing, consider these strategies:
- Increase rents or reduce vacancy
- Lower operating expenses
- Make a larger down payment to reduce debt service
- Seek a longer amortization period
- Shop for better interest rates