What is DSCR and why do commercial lenders require it?

DSCR (Debt Service Coverage Ratio) measures a property's ability to cover its loan payments from its own income. It is calculated by dividing Net Operating Income (NOI) by annual debt service (total loan payments). A DSCR of 1.0 means income exactly covers debt payments; 1.25 means income is 25% higher than required. Most commercial lenders require a minimum DSCR of 1.20 to 1.30. A higher DSCR provides a safety cushion if vacancy increases or expenses rise. DSCR loans for investment properties also exist in the residential space, allowing self-employed and investor borrowers to qualify based on property cash flow rather than personal income.