The debt service coverage ratio (DSCR) is used by bank loan officers to determine income property loans. Most lenders require a minimum DSCR of 1.2.
A DSCR of 1.0 is called break even. A DSCR below 1.0 signals a net operating loss based on the debt structure. A DSCR over one means that the property is generating enough income to pay the debt obligations.
The following formula determines the debt service coverage ratio:
DSCR = Net Operating Income/Total Debt Service
DSCR = (Monthly Net Income)/ (Monthly Principal and Interest Payment on Loan)