What is a good DSCR?
Most commercial real estate lenders set minimum debt service coverage ratios in the 1.20x to 1.25x range, so a DSCR at or above 1.25x clears the common covenant, and ratios around 1.40x and higher read as conservative. Riskier asset classes and riskier business plans carry higher floors, and the minimum that governs your deal is the one on your term sheet, tested the lender's way: usually at a stressed rate, on an amortizing payment, against the lender's own normalized NOI. The more useful reading is the cushion: a 1.25x DSCR means income can fall 20% before it stops covering the payment.
The conventions, and where they come from
The debt service coverage ratio is net operating income divided by annual debt service, and lenders set a floor on it because the space between 1.00x and the floor is their margin of safety. Floors in the 1.20x to 1.25x range are common across banks, agency multifamily lenders and CMBS conduits. They are conventions rather than laws: the floor rises for asset classes whose income is more volatile, for operating businesses like hotels, for lease-up and transition stories, and whenever credit conditions tighten.
Nothing on this page can tell you the floor your lender will quote this quarter. The conventions are the start of the conversation; the covenant in your loan documents is the end of it.
The cushion is what the ratio means
A coverage ratio converts to the share of income the property can lose before the payment stops being covered, and that conversion is the honest way to read one. At 1.20x, income can fall about 17% before coverage reaches 1.00x. At 1.25x, 20%. At 1.50x, a third. Two ratios that sound adjacent can sit a meaningfully different distance from trouble.
The covenant sits closer than 1.00x does. A deal running at 1.25x against a 1.20x covenant has a cushion of about four percent of income before a covenant conversation, not twenty. Both distances are worth knowing, and the shorter one is the one that arrives first.
| DSCR | Income decline to 1.00x |
|---|---|
| 1.15x | 13% |
| 1.20x | 17% |
| 1.25x | 20% |
| 1.40x | 29% |
| 1.50x | 33% |
The lender's DSCR is not your DSCR
The ratio that sizes the loan is usually computed on numbers less friendly than yours. Lenders commonly test at a stress rate above the contract coupon, on the amortizing payment even when the loan begins interest only, and on their own normalized NOI, with a vacancy factor applied, a management fee imputed whether or not one is paid, and replacement reserves deducted above the line.
Every one of those choices pulls the sizing DSCR below the one computed at your desk, which is why a deal that covers comfortably on the broker's numbers can come back from committee with smaller proceeds. Ask which rate, which payment and whose NOI the floor is tested on before comparing any two quotes.
A good year one can hide a bad year four
Coverage is a ratio per year, not a property constant. An interest-only period holds the payment down and the ratio up for exactly as long as it lasts, then amortization begins and the ratio steps down on the same income. Expenses that grow faster than rents erode it further.
The number worth reporting is the minimum across the hold, run against the downside case. A loan can show 1.35x in year one and breach a 1.20x covenant in year four on flat income, and the year-one figure will have said nothing about it.
Coverage is one of three tests
DSCR does not size a loan alone. Lenders run a loan-to-value cap against the appraisal and a debt yield floor against the income at the same time, and fund the smallest of the three answers. Which test binds flips with the rate environment: when rates rise, the mortgage constant rises, coverage binds first, and proceeds shrink even though nothing happened to the building.
Altyst sizes debt on a loan-to-value cap, a minimum coverage test at a stress rate, or a debt yield floor, whichever binds, and reports coverage and debt yield for every year of the hold, so an interest-only step-down or a thinning cushion is visible before a lender finds it. The free DSCR calculator on this site does the single-year arithmetic without an account, solving any one of NOI, debt service and coverage from the other two and stating the covenant as dollars of income headroom, and the loan sizing calculator runs all three tests together and names the binding one.
Related questions
What DSCR do lenders require?
Minimums in the 1.20x to 1.25x range are common across banks, agency lenders and CMBS conduits, with higher floors for riskier asset classes and business plans. The figure that matters is the covenant on your term sheet, and lenders usually test it at a stressed rate on their own normalized NOI rather than on the borrower's numbers.
What does a 1.25x DSCR mean?
The property produces 25% more net operating income than the annual loan payment requires. Read as a cushion, income can fall 20% before coverage reaches 1.00x, the point where income exactly covers the payment.
Is a DSCR below 1.00x ever acceptable?
It means the property does not currently cover its payment, which is common and deliberate in lease-up and heavy renovation deals financed with bridge debt and an interest reserve. It is workable when the shortfall is funded and the path to coverage is underwritten, and dangerous when it is discovered rather than planned.
Why is my DSCR different from the lender's?
Because the inputs differ on both sides of the division. Lenders commonly test at a stress rate above the contract coupon, on the amortizing payment even during an interest-only period, and on a normalized NOI with a vacancy factor, an imputed management fee and replacement reserves deducted. Each choice lowers the ratio relative to a borrower's calculation on actuals.
Does an interest-only loan improve DSCR?
It raises the reported ratio for as long as the interest-only period lasts, because the payment excludes principal. Many lenders size the loan on the amortizing payment anyway, and the ratio steps down on the same income the month amortization begins, which is why coverage should be checked for every year of the hold.
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