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Guide 4 min read
Understanding DSCR
What the Debt Service Coverage Ratio means, how lenders calculate it, and how to strengthen yours.
What Is DSCR?
- DSCR stands for Debt Service Coverage Ratio — it measures your net operating income relative to your total debt obligations
- Formula: DSCR = Net Operating Income ÷ Total Annual Debt Service
- A DSCR of 1.0x means income exactly covers debt payments. Lenders want a cushion above 1.0x.
What Lenders Look For
- 1.25x or higher — strong file, most lenders will approve
- 1.20x–1.24x — acceptable range, may require additional documentation
- Below 1.20x — may need to restructure the deal, increase equity, or explore alternative lenders
- SBA loans typically require a minimum 1.15x–1.25x DSCR depending on loan type
How to Improve Your DSCR
- Increase your down payment to reduce the loan amount and lower annual debt service
- Extend the loan term to spread payments over more years
- Document all revenue streams — rental income, contract income, and side revenue count
- Reduce existing debt obligations before applying
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