1. What is Debt Service Coverage Ratio?

The Debt Service Coverage Ratio (DSCR) is a financial metric that measures a property's ability to cover its debt obligations with its net operating income. It's commonly used by lenders to assess the risk of a mortgage loan.

2. How Does the DSCR Calculator Work?

The calculator uses the DSCR formula:

Where:

• \( NOI \) — Net Operating Income (annual income after operating expenses)
• \( Total\ Debt\ Service \) — Annual mortgage payments (principal + interest)

Explanation: A DSCR of 1.0 means the property generates exactly enough income to cover its debt payments. Higher values indicate better coverage.

3. Importance of DSCR Calculation

Details: Lenders typically require a minimum DSCR (often 1.20-1.25) to ensure the property generates sufficient income to cover debt payments with a margin of safety.

4. Using the Calculator

Tips: Enter annual NOI and total annual debt service in dollars. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good DSCR for a mortgage?
A: Most lenders look for a DSCR of at least 1.20-1.25. Higher ratios (1.5+) are considered very strong.

Q2: How is NOI calculated?
A: NOI = Gross Rental Income - Operating Expenses (excluding debt service).

Q3: What if my DSCR is below 1.0?
A: A DSCR < 1.0 means the property doesn't generate enough income to cover its debt payments, making it difficult to secure financing.

Q4: Does DSCR include taxes and insurance?
A: Taxes and insurance are typically included in operating expenses when calculating NOI, but not in the debt service amount.

Q5: Can DSCR be used for residential properties?
A: While primarily used for commercial properties, DSCR can also be calculated for residential investment properties.