How do you compute debt service coverage ratio (DSCR) and what does it indicate for lenders?

How do you compute debt service coverage ratio (DSCR) and what does it indicate for lenders?

• A. DSCR = Net operating income / Annual debt service; indicates ability to cover debt obligations
• B. DSCR = Annual debt service / Net operating income
• C. DSCR = NOI / Interest rate
• D. DSCR = (NOI - debt service) / Sales price

Answer: (A)

Debt service coverage ratio shows whether the property's income is enough to meet its loan payments. Net operating income is the income remaining after operating expenses, excluding financing costs and taxes. Annual debt service is the total principal and interest payments due in a year. DSCR is NOI divided by annual debt service. This ratio tells lenders how many dollars of NOI are available to cover each dollar of debt service. A DSCR above 1 means there’s enough income to cover debt service, which lowers default risk for the lender; many lenders require a minimum level (often around 1.2 or 1.25, depending on risk and property type). If DSCR is below 1, debt service isn't fully covered, signaling higher risk. The other formulas don’t measure the ability to service debt.

Debt service coverage ratio shows whether the property's income is enough to meet its loan payments. Net operating income is the income remaining after operating expenses, excluding financing costs and taxes. Annual debt service is the total principal and interest payments due in a year. DSCR is NOI divided by annual debt service. This ratio tells lenders how many dollars of NOI are available to cover each dollar of debt service. A DSCR above 1 means there’s enough income to cover debt service, which lowers default risk for the lender; many lenders require a minimum level (often around 1.2 or 1.25, depending on risk and property type). If DSCR is below 1, debt service isn't fully covered, signaling higher risk. The other formulas don’t measure the ability to service debt.