Question 1

What is DSCR?

Accepted Answer

DSCR is the Debt Service Coverage Ratio: net operating income (NOI) divided by annual debt service (the year's principal and interest). It tells a lender — and you — how many dollars of operating income are available to cover each dollar of debt payments. A DSCR of 1.25x means you have $1.25 of NOI for every $1 of P&I, leaving a 25% cushion. Below 1.0x, the property doesn't generate enough operating income to cover its own debt and must dip into reserves or equity. DSCR is the single most-cited metric in commercial real estate, multifamily, SBA, and non-bank investor lending.

Question 2

How is DSCR calculated?

Accepted Answer

DSCR = Net Operating Income ÷ Annual Debt Service. NOI is property income (rents + other income) minus property operating expenses (taxes, insurance, management, repairs, utilities, reserves) — but it excludes the mortgage P&I, depreciation, income tax, and capex by definition. Annual debt service is the monthly P&I payment times 12. For example: a property with $120,000 of NOI and $96,000 of annual debt service has a DSCR of 1.25x.

Question 3

What's a good DSCR for commercial real estate?

Accepted Answer

Most commercial banks underwrite to a 1.20x – 1.25x minimum DSCR for stabilized properties. The Fannie Mae Multifamily Selling Guide sets DSCR floors that vary by product but typically land at 1.25x for standard fixed-rate loans and 1.30x or higher for non-recourse or aggressively leveraged structures. Higher-quality sponsors and lower-LTV deals can sometimes get to 1.15x; tertiary markets, value-add deals, and short amortizations push the requirement up to 1.30x – 1.40x. Source: Fannie Mae Multifamily Selling Guide §B6.

Question 4

What's the SBA 504 DSCR requirement?

Accepted Answer

SBA SOP 50 10 6 sets a 1.15x minimum DSCR floor for SBA 504 owner-occupied real estate loans, but most participating banks and CDCs require 1.20x – 1.25x in practice — the SBA floor is the lender's worst-case backstop, not their actual underwriting target. SBA 7(a) follows similar logic, with most lenders wanting 1.15x – 1.25x global DSCR (blended business + personal). Source: SBA SOP 50 10 6 — Lender and Development Company Loan Programs.

Question 5

What if my DSCR is below 1.0?

Accepted Answer

DSCR below 1.0 means the property's current cash flow doesn't cover its own debt — but that's not always fatal. Three common scenarios where investors fund sub-1.0 deals anyway: (1) value-add plays where current NOI is artificially low and post-renovation NOI is projected to clear 1.20x, with the investor funding the gap from reserves until lease-up; (2) below-market rents where the current rent roll is the bottleneck and the underwriting model uses pro-forma rents that pencil; (3) sponsor-funded shortfall, where the investor accepts negative cash flow during a defined hold period in exchange for upside on exit. Banks rarely fund sub-1.0 deals at origination — the capital comes from sponsor equity or specialty bridge lenders pricing the risk explicitly.

Question 6

Should I include capex in NOI?

Accepted Answer

No — by convention, NOI sits below revenue and above capital expenditures. Capex (roof replacement, HVAC overhauls, parking lot resurfacing) is treated as a separate line below NOI because it doesn't recur every year and timing is discretionary. Some lenders compute a more conservative DSCR using NOI minus a reserves-for-replacement line (typically $250 – $400 per unit per year for multifamily) to capture the long-run capex obligation in the ratio. Fannie Mae's underwriting almost always includes a replacement reserve in the DSCR calculation; bridge and DSCR-loan lenders sometimes do, sometimes don't. Read the term sheet.

Question 7

Does DSCR apply to residential rentals?

Accepted Answer

Yes — same formula, same math. The phrase 'DSCR loan' in the residential investor market specifically means a no-personal-income-verification mortgage where the lender qualifies the borrower entirely on the property's projected DSCR rather than the borrower's W-2 or tax returns. These loans are common for 1-4 unit residential investment properties and are offered by non-bank lenders (Kiavi, Visio, CoreVest, etc.) at slightly higher rates than agency conventional loans, with DSCR floors typically ranging from 1.0x (aggressive) to 1.25x (conservative). They're useful for self-employed buyers, portfolio investors past Fannie Mae's 10-property limit, and anyone whose tax returns understate their income.

Question 8

What's the difference between DSCR and DTI?

Accepted Answer

DTI (Debt-to-Income) is a personal underwriting metric: monthly debt obligations divided by gross monthly income, used by residential mortgage and consumer lenders. DSCR is a property or business cash-flow metric: NOI divided by debt service, used by commercial and investment-property lenders. The key distinction: DTI looks at the borrower's salary and existing personal debts (car loan, student loans, credit cards), while DSCR looks at whether the asset itself produces enough cash to cover the loan you're putting on it. A self-employed investor with great rental cash flow might fail DTI underwriting (volatile reported income) but easily clear DSCR underwriting (the property pencils).

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