How the Debt Service Coverage Ratio Calculator works
Debt Service Coverage Ratio (DSCR) measures whether a property's or business's income is enough to cover its loan payments. Lenders use it to underwrite commercial real estate loans, investment-property mortgages, and business loans; borrowers use it to check whether a deal can support the debt before making an offer.
The formula
DSCR = Net Operating Income (NOI) / Annual Debt Service
Net Operating Income is annual gross income minus annual operating expenses, calculated before any debt payments: NOI = Gross Income − Operating Expenses. Annual Debt Service is the total of the year's loan principal and interest payments. This calculator derives annual debt service from a loan amount, interest rate, and amortization term using the standard mortgage payment formula: monthly payment = L × i / (1 − (1 + i)−n), where L is the loan amount, i is the monthly interest rate, and n is the number of monthly payments — then multiplies by 12.
Worked example
Take $120,000 of annual gross income, $36,000 of operating expenses, an $800,000 loan at 7% amortized over 30 years. Net operating income is $120,000 − $36,000 = $84,000. The monthly payment on the loan is about $5,322, so annual debt service is about $63,869. DSCR = $84,000 / $63,869 ≈ 1.32 — income covers debt payments with roughly 32% to spare.
Reading the ratio
- DSCR > 1.0: net operating income exceeds annual debt service — the property or business generates a surplus after covering its loan payments.
- DSCR = 1.0: income exactly equals debt payments, leaving no cushion for vacancies, repairs, or expense increases.
- DSCR < 1.0: income falls short of debt payments — the shortfall has to come from other funds.
- Many commercial and investment-property lenders set a minimum DSCR, commonly in the 1.20-1.25 range, though the exact threshold varies by lender, property type, and loan program.
What moves the ratio most
DSCR responds directly to both halves of the fraction. On the income side, raising gross income or cutting operating expenses raises NOI and therefore DSCR. On the debt side, a larger loan, a higher interest rate, or a shorter amortization term all raise annual debt service and pull DSCR down. Because the loan-payment formula is non-linear, a small rate increase near a lender's minimum DSCR can be enough to change whether a deal qualifies.
Assumptions and scope
This calculator assumes a single fully-amortizing loan with a fixed interest rate and monthly payments — it does not model interest-only periods, balloon payments, multiple loans, or variable rates. Operating expenses should already exclude debt service (principal and interest), since NOI is defined before financing costs. This is a computational tool, not personalized lending or investment advice; confirm the exact DSCR definition and threshold with your lender, since some lenders adjust NOI for vacancy allowances or capital reserves.