The formula
The debt service coverage ratio, DSCR, is the lender’s question in one number: can the property’s income cover its loan payments. The formula is one division. Take the property’s annual net operating income — the income the property earns after its operating expenses, before debt payments, income taxes and depreciation — and divide it by the annual debt service, the year’s loan payments. A DSCR of 1.25 means the property earns $1.25 for every $1.00 of loan payments. This guide works the calculation in seven steps.
Step 1 — Find the net operating income
Start with the property’s gross operating income — the rent and other operating income for the year — and subtract the operating expenses: taxes, insurance, maintenance, management and vacancies. The result is the net operating income, NOI. Do not subtract the loan payments, the income taxes or the depreciation: those come later, and the DSCR measures the income before them. On the worked example the NOI is $120,000.00 a year.
Step 2 — Find the annual debt service
Add up the year’s loan payments — principal and interest together, on every loan the property carries. The number you need is the full year’s payments, not one month’s. On the worked example the annual debt service is $96,000.00, or $8,000.00 a month.
Step 3 — Divide the income by the debt service
Divide the net operating income by the annual debt service. That is the DSCR. On the worked example it is $120,000.00 ÷ $96,000.00 = 1.25. The property earns $1.25 for every $1.00 of loan payments, so it meets the usual 1.25 lender bar exactly. Round the ratio to two decimals: 1.56 on $150,000.00 of income, 1.04 on $100,000.00, and 0.94 on $90,000.00 — below 1.00, so the property does not cover its payments.
Step 4 — Divide the debt service by 12
Divide the annual debt service by 12 to get the monthly debt service — the number that lands on the statement each month. On the worked example it is $96,000.00 ÷ 12 = $8,000.00 a month. This step changes nothing about the ratio: measured monthly instead of yearly, the DSCR is still 1.25, because $10,000.00 of income a month over $8,000.00 of debt service a month is the same fraction as $120,000.00 over $96,000.00. The period cancels.
Step 5 — Work out the most debt service the lender allows
Divide the net operating income by the lender’s bar to find the most debt service the lender will allow. On the worked example it is $120,000.00 ÷ 1.25 = $96,000.00 a year. At the lower 1.20 bar it is $120,000.00 ÷ 1.20 = $100,000.00 a year. This is how the lender sizes the loan: the most they will lend is the loan whose payments keep the ratio above their bar, so a lower bar means a bigger loan.
Step 6 — Work out the income the bar needs
Multiply the lender’s bar by the debt service to find the income the property must earn. On the worked example it is 1.25 × $96,000.00 = $120,000.00. At the 1.20 bar it is 1.20 × $96,000.00 = $115,200.00, and at the 1.50 bar it is 1.50 × $96,000.00 = $144,000.00.
Step 7 — Check the result against the lender’s bar
Compare the DSCR with the lender’s bar. On the worked example the DSCR is 1.25 and the bar is 1.25, so the property meets the bar exactly, with $24,000.00 a year left over after the loan payments — the 0.25 of headroom the 1.25 ratio gives. Check the arithmetic: 1.25 × $96,000.00 = $120,000.00, the income, and $8,000.00 × 12 = $96,000.00, the annual debt service. One warning: the reverses are judged on the UNROUNDED ratio. At $119,999 of income the unrounded DSCR is 1.249990 — it shows as 1.25 only after rounding, and it is still below the 1.25 line.
Three worked examples
The headline example: $120,000.00 of income and $96,000.00 of debt service. The DSCR is $120,000.00 ÷ $96,000.00 = 1.25, the monthly debt service is $96,000.00 ÷ 12 = $8,000.00, and the most debt service allowed at the 1.25 bar is $120,000.00 ÷ 1.25 = $96,000.00 a year. Income of $150,000.00 instead: the DSCR is 1.56, and the most debt service allowed at the 1.25 bar is $120,000.00 a year. Debt service of $80,000.00 instead: the DSCR is 1.50, the monthly debt service is $6,666.67, and the income needed at the 1.25 bar is $100,000.00. Use the DSCR calculator to run your own numbers.
Two reverses to check your answer
Two numbers are worth knowing. The smallest whole-dollar annual NOI for the DSCR to reach 1.25 is $120,000 — at $120,000 the DSCR is 1.25, and at $119,999 the unrounded DSCR is 1.249990, shown as 1.25 only after rounding, still below the line. The largest whole-dollar annual debt service for the DSCR to STAY at or above 1.25 is $96,000 — at $96,000 the DSCR is 1.25, and at $96,001 the unrounded DSCR is 1.249987, shown as 1.25 only after rounding, still below the line.
What to do below 1.00
A DSCR below 1.00 means the property does not earn enough to cover its loan payments. On $90,000.00 of income and $96,000.00 of debt service the DSCR is 0.94 — the income falls $6,000.00 a year short of the payments. The fixes are the same three levers the formula gives you: raise the income, cut the debt service, or both. Raising the rents, cutting the vacancies or cutting the operating expenses lifts the NOI; a bigger down payment, a longer term or a lower rate cuts the debt service. The smallest whole-dollar income that reaches 1.00 is $96,000 — at $95,999 the unrounded DSCR is 0.999990, shown as 1.00 only after rounding, still below the line.
How the ratio sizes the loan
Lenders size the loan from the DSCR, not the other way round. They take the property’s income, divide it by their bar, and that is the most debt service they will allow — $96,000.00 a year on the worked example at the 1.25 bar, $100,000.00 a year at the 1.20 bar. Then they work backwards from that payment to the loan amount: the bigger the payment the property can carry, the bigger the loan.
What the number does not tell you
The DSCR tells you whether the income covers the payments, not whether the property is a good buy. It does not include the loan term, the interest rate, or the down payment — only the payments themselves. It cannot judge the income: net operating income is gross operating income minus operating expenses, before debt payments, income taxes and depreciation, and a lender will check the rent roll, the vacancy rate and the expense history behind the number. The 1.20–1.25 bar is the usual range, not a rule, and some lenders want more. Use the DSCR to see whether the income covers the payments — then let the lender underwrite the rest.