DSCR is net operating income divided by annual debt service — the first number most commercial lenders look at, and often the one that sets your loan size.
Debt service coverage ratio — DSCR — measures whether a property’s income covers its loan payments. It’s the first number most commercial lenders look at, and it often decides how large a loan they’ll offer.
A DSCR of 1.25x means the property generates 25% more income than it needs to cover its annual debt service. At 1.00x, income exactly covers the payment with no cushion. Below 1.00x, the property doesn’t earn enough to pay its own debt.
A quick example
A retail property produces $500,000 in NOI and carries $400,000 in annual debt service (principal and interest).
That 1.25x tells the lender the property has a 25% income cushion above the payment. Run your own numbers in the DSCR Calculator.
What counts as a “good” DSCR?
There’s no universal number — it turns on property type, risk, and the lender. As a rough guide, stabilized senior lenders often look for minimums in this range:
- Multifamily and industrial: around 1.20x–1.25x
- Office and retail: around 1.25x–1.35x
- Hotels and other higher-volatility assets: 1.40x or higher
Riskier cash flows demand more cushion. A property with long-term credit leases supports a lower DSCR than one living on short-term, turnover-heavy income.
How lenders use DSCR to size a loan
DSCR isn’t just a pass/fail check — lenders use it to set maximum proceeds. They take the property’s NOI, divide by their minimum DSCR to find the largest debt service the property can carry, then convert that into a loan amount using the rate and amortization.
So a property with $500,000 NOI and a 1.25x minimum can carry at most $400,000 of annual debt service; whatever loan that payment supports is the DSCR-constrained maximum. DSCR is frequently the binding constraint, especially when rates are high. See how lenders size CRE loans for how it stacks up against debt yield and LTV.
Things that trip people up
- NOI, not cash flow after debt. DSCR uses net operating income — income after operating expenses but before debt service and capital items. Don’t subtract the mortgage before you calculate it.
- Annual, not monthly. Use the full year’s NOI and the full year’s debt service. Monthly figures work too, as long as both sides match.
- Interest-only changes the picture. During an interest-only period, debt service is lower, so DSCR looks higher — but lenders may still size to the fully amortizing payment.
- Stress rates. Some lenders calculate DSCR using a rate above today’s market rate to guard against future increases, which lowers the loan they’ll offer.
How Mercury helps
DSCR is one of three tests that determine your loan. We model all of them, identify which one limits your deal, and structure the request accordingly — then run a competitive lender process where we’re licensed or exempt. Start with the DSCR Calculator, then discuss your financing scenario.
Frequently asked questions
What is a good DSCR for a commercial loan?
Most stabilized senior loans target a minimum between 1.20x and 1.40x depending on property type and risk. Higher-volatility assets require more cushion.
What does a 1.25x DSCR mean?
The property’s net operating income is 25% higher than its annual debt service — a 25% cushion above the payment.
Is a higher DSCR always better?
For the lender, more cushion is safer. For the borrower, a very high DSCR can mean you’re under-levered relative to what the asset supports; it depends on your objectives.
What’s the difference between DSCR and debt yield?
DSCR factors in your rate and amortization; debt yield ignores both and measures income against the loan amount. They protect lenders against different risks. See debt yield explained.