DSCR
Debt Service Coverage Ratio — a measure of a property's ability to cover its mortgage payments, calculated by dividing NOI by annual debt service. Lenders typically require above 1.25.
Example
“With $120,000 in NOI and $80,000 in annual mortgage payments, the property's DSCR was 1.5 — comfortably above the 1.25 lender minimum.”
Memory Tip
DSCR = can the property PAY its own mortgage? Above 1.25 = yes, with cushion.
Why It Matters
DSCR is crucial because it determines whether a property generates enough income to pay its debts, which directly affects your ability to qualify for a mortgage and the terms you receive. Understanding this ratio helps you assess if an investment property will be profitable or if you are overleveraging yourself financially.
Common Misconception
Many people believe that DSCR only matters for commercial properties or large investors, but it applies equally to anyone buying a rental property or using a property for income-generating purposes. Even owner-occupied homes can be evaluated on DSCR by lenders when borrowers have multiple properties or non-traditional income sources.
In Practice
Suppose a rental property generates 50,000 dollars in annual net operating income and has annual debt service obligations of 40,000 dollars, resulting in a DSCR of 1.25. This means the property generates 1.25 dollars in income for every 1 dollar of debt payments, meeting most lenders minimum requirements and indicating the property can comfortably cover its mortgage.
Etymology
Acronym for Debt Service Coverage Ratio. How well property income COVERS (services) the DEBT.
Common Misspellings
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See Also
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