Debt Service Coverage Ratio (DSCR) Calculator

Debt Service Coverage Ratio (DSCR)

Debt Service Coverage Ratio, or DSCR, is a measurement of a property’s cash flow versus its debt obligations. In multifamily real estate, that entity is typically an income-producing property. The rule of thumb is that when an entity is shown to have a DSCR of less than 1, then that means that its income is less than its monthly debt obligations. In contrast, if a property has a DSCR of exactly 1, then that means its income is equal to its monthly debt obligations. Finally, when a property has a DSCR of more than 1, it means its income is greater than its monthly debts. Most apartment loan programs have DSCR minimums in place that help to determine eligibility.

DSCR Calculator

The DSCR Formula

In order to calculate the debt service coverage ratio for a multifamily property, you can use the formula: Net Operating Income/Debt Obligations. It’s essential to make sure you have ALL of the correct numbers before utilizing the formula.

Net Operating Income (NOI) for the DSCR formula is income after operating expenses, including property taxes and insurance, before debt service, depreciation, capital expenditures, and the owner’s income taxes. It is often compared to EBITDA, but property taxes do come out of NOI. Debt Obligation encompasses all debts (recurring and outstanding) to be paid by the entity, usually calculated annually.

So, for example, if a property has an NOI of $1,000,000, and an annual debt obligation of $850,000, it would have a DSCR of:

1,000,000/850,000 = 1.18x DSCR

DSCR in Relation to Apartment Loans

When a lender is evaluating a borrower for an apartment loan, the debt service coverage ratio is typically one of the most important factors, if not THE most important factor that gets considered in a loan transaction. Lenders scrutinize a property's DSCR as one of the best predictors of whether a borrower will be able to pay back a loan sum. Many apartment loan programs set their minimum DSCR requirement at 1.25x, though in practice, the required DSCR will typically depend on the financial strength of the borrower, the type of property in question, and other key factors.

What else is DSCR used for?

The DSCR metric represents the amount of export earnings needed by a country to cover the annual interest and principal payments on its external debt In the context of government finance. In the context of personal finance, a person's DSCR is used by bank loan officers to determine eligibility for income property loans.

Regardless of the context, however, the debt-service coverage ratio reflects the ability of an entity to service debt considering their current level of income. The ratio takes into account net operating income against debt obligations due within one year. The debt obligations that are considered are numerous, including interest, principal, lease payments to name a few.

Lenders across the finance sector routinely assess a borrower's DSCR before approving a loan. The debt-service coverage ratio in conjunction with other standard underwriting criteria helps them determine the level of risk involved in originating a loan, with DSCR specifically representing the borrower ability to afford covering the debt. The minimum DSCR required by a lender often depends on current macroeconomic conditions. In a healthy, growing economy, credit is more readily available, and borrowers are more likely to get approved for a loan. with a lower ratio.

The 2008 financial crisis, however, has shown the possible repercussions of what happens when there is a trend of lending to less qualified borrowers. The brunt of the crisis formed when subprime borrowers were able to obtain near unchecked credit in the form of mortgages, with very little due diligence. Ultimately, these under-qualified borrowers began to default on these mortgages, causing the financial institutions that financed these notes to collapse.

What is a good DCSR?

The most important thing to remember is that a “good” DSCR depends wholly on the requirements of the lender for the loan product in question. A widely accepted standard, however, is that a DSCR above 1.25 is often considered “strong,” and DSCR ratios below 1.00 are decent indicators that the borrower may be facing some financial hardships. This is because a DSCR of less than 1.00 reflects a negative cash flow, which, to lenders means that the borrower will be unable to cover the costs of their debt obligations without needing to borrow more.

In practice, a DSCR of 0.93 equates to the borrower only having sufficient income to cover 93% of their annual debt obligations. To a lender, this represents extremely high risk, as this metric basically shows that the borrower will need additional income to be able to make payments towards their debts. Even then, If the debt-service coverage ratio is higher than, but still too close to 1.0, then the borrower is considered to be vulnerable, as any minor decline in cash flow could render them unable to service their debt.

For these reasons, the majority of Lenders in many cases require that the borrower maintain a minimum DSCR to qualify, and sometimes even a DSCR threshold while the loan is outstanding. In these cases, a lender will consider a borrower who falls below that minimum to be in default.

DSCR Calculator

Annual net operating income ($)Annual debt service ($)

DSCR

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If a maturing loan will not refinance at today's rates, the apartment refinance calculator shows how much cash a permanent refinance would take and the NOI that would close it without new equity.

Agency DSCR minimums and what they mean for loan size

On most apartment loans the minimum DSCR, not the maximum LTV, sets how much you can borrow. The agencies publish their minimums, so you can work out the ceiling on your loan before you ask for a quote.

These are floors. A lender can ask for more coverage on a weaker property, a smaller market or a cash-out refinance, and it tests the ratio on its own underwritten NOI, which is usually lower than the NOI on your operating statement because it applies a vacancy floor, a management fee and replacement reserves.

The minimum matters more than it looks. Say a building has $600,000 of underwritten NOI and the loan is priced at a hypothetical 6.25% on 30-year amortization:

Each tenth of a turn of coverage moves this loan by roughly half a million dollars, with nothing about the building changing.

How to solve for your maximum loan

The calculator above takes a loan and tells you the DSCR. To go the other way, from the lender's minimum to the largest loan, work it in three steps:

1. Find the maximum debt service. Divide underwritten NOI by the minimum DSCR. $600,000 / 1.25 = $480,000 a year.
2. Find the loan constant. The constant is the annual payment per dollar of loan at the quoted rate and amortization. At a hypothetical 6.25% on 30-year amortization it is about 7.39%. On 25-year amortization at the same rate it is about 7.92%, which is why shorter amortization shrinks the loan.
3. Divide. $480,000 / 0.0739 = about $6,500,000. Then compare that number to the LTV limit on the appraised value. The lower of the two is your loan.

Two details change the answer. First, if the loan has an interest-only period, many lenders still test DSCR on the amortizing payment, so interest-only does not automatically raise proceeds. Second, the rate used in the test is the rate at lock, so a quote sized today can shrink if rates rise before you lock. The DSCR sensitivity calculator shows your maximum loan across a grid of rate moves and NOI changes. If the number comes out below your current payoff, what to do when a refinance won't size walks through the options.

DSCR questions from apartment owners

What DSCR do Fannie Mae and Freddie Mac require on small apartment loans?

Fannie Mae's Small Mortgage Loans and Freddie Mac's Conventional Small program both publish a minimum DSCR of 1.25x with a maximum LTV of 80%. HUD 223(f) allows 1.15x for market-rate properties and 1.11x for affordable properties. Lenders can require more coverage on a particular deal, and they measure it on their own underwritten NOI rather than your operating statement.

Why is the lender's DSCR lower than mine?

The lender recalculates NOI before testing coverage. It typically applies a minimum vacancy factor, charges a management fee even if you self-manage, deducts replacement reserves per unit, and trends taxes and insurance to current levels. Each adjustment lowers NOI, so the same loan shows less coverage. Debt service is also calculated at the lender's quoted rate and amortization, not your current loan's.

Does an interest-only period help my DSCR?

It lowers your payment during the interest-only period, but it often does not raise the loan amount. Many lenders size the loan by testing DSCR on the amortizing payment that applies after the interest-only period ends. Some programs allow a lower coverage test with partial interest-only, so ask each lender which payment it uses in the sizing test.

How do I calculate the maximum loan from a DSCR requirement?

Divide underwritten NOI by the minimum DSCR to get the most the property can pay in annual debt service. Then divide that amount by the loan constant, which is the annual payment per dollar of loan at the quoted rate and amortization. The result is the DSCR-sized loan. Your actual loan is the lower of that figure and the program's LTV limit on appraised value.