Debt Service Coverage Ratio (DSCR)
Definition
DSCR measures whether a property's income covers its mortgage payments, dividing net operating income by the annual debt payments. It is the central test in commercial lending.
How it works
Net operating income is gross rent minus vacancy allowance and operating expenses such as property taxes, insurance, maintenance, and management — before mortgage payments. A building earning $125,000 of NOI with $100,000 in annual payments has a DSCR of 1.25x.
Most conventional commercial lenders require 1.20x to 1.30x. CMHC-insured multi-family financing can accept as low as 1.10x because the insurance offsets the lender's risk.
If the ratio falls short, the levers are a smaller loan, a longer amortization, a lower rate, or a lower purchase price. Improving the property's income also works, but lenders underwrite actual and stabilized income rather than projections.
Quick facts
- DSCR = net operating income ÷ annual mortgage payments.
- Conventional lenders want 1.20x–1.30x.
- The property's income matters more than the borrower's.
Put this into practice
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