A debt service coverage ratio (DSCR) is a measurement of an entity’s cash flow vs. its debt obligations. In multifamily and commercial real estate, that entity is typically an income-producing property, while in corporate finance, the entity is usually a business or corporation. If an entity has a DSCR less than 1, its income is less than its monthly debt obligations. In contrast, if an entity has a DSCR of 1, then its income is equal to its monthly debt obligations, while if it has a DSCR of more than 1, its income is greater than its monthly debts.

When applying for an SBA Express loan, lenders almost always check your "DSCR." For those who are unfamiliar with the term, debt service coverage ratio (DSCR) refers to the borrower's ability to repay debt obligations. Debt service is the money needed to cover both interest and principal in a payment period. The ratio is a formula that divides the net operating income of a business by the total debt service amount:

DSCR = Net Operating Income / Total Debt Service

So, a business with a DSCR of less than 1 does not have sufficient funds to pay back debt obligations, while a business with a DSCR of greater than 1 does.

A debt service coverage ratio is calculated by dividing the net operating income (NOI) by the entity's annual debt service. The formula for calculating the debt service coverage ratio looks like this:

DSCR = Net Operating Income ÷ Annual Debt Service

DSCR = $845,000 ÷ $758,475

DSCR = 1.10x

The formula shows that the cash flow generated by the target property will end up covering the new commercial loan payments by 1.10x. This figure is considered lower than many commercial mortgage lenders require. Most lenders require a minimum DSCR of 1.20x.

Debt service coverage ratios of at least 1.0x are considered to be in the breakeven range. At the same time, any figures below 1.0x would be a net operating loss for the prospective debt structure taken on by the entity.

Source: www.multifamily.loans/apartment-finance-blog/what-is-dscr

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.

A widely accepted standard 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. To a lender, a DSCR of 0.93 represents extremely high risk, and any minor decline in cash flow could render them unable to service their debt. The majority of lenders require that the borrower maintain a minimum DSCR to qualify, and sometimes even a DSCR threshold while the loan is outstanding.

The debt service coverage ratio (DSCR) is a ratio of cash available for servicing debt (generally principal and interest mortgage payments). It is used to measure an entity's ability to produce enough funds to completely cover their debt payments, including payments delegated to leases. The higher the ratio gets, the easier it becomes for that entity to obtain financing.

The loan-to-value ratio (LTV) is a measure of the loan amount relative to the value of the property. It is calculated by dividing the loan amount by the appraised value of the property. Lenders use the LTV to determine the risk of the loan, and it is often used in combination with the debt service coverage ratio (DSCR).

Having a high debt service coverage ratio (DSCR) has several benefits. A high DSCR indicates that a borrower has the ability to generate enough cash flow to cover their loan payments. This makes it easier for them to obtain financing. A high DSCR also indicates that the borrower is likely to have a lower risk of defaulting on their loan. This makes them more attractive to lenders, who may be willing to offer more favorable terms, such as lower interest rates or longer repayment periods. Additionally, a high DSCR can help a borrower qualify for larger loan amounts, as lenders are more likely to be willing to lend more money to borrowers with a higher DSCR.