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Will the rent cover the loan payment? Enter net operating income and annual debt service to get the debt service coverage ratio a lender underwrites to.
DSCR = Net Operating Income ÷ Annual Debt Service. Debt service is a full year of principal and interest together, not interest alone. On the $425,000 duplex with $26,220 of NOI, a $340,000 loan at 7% over 30 years costs about $2,262 a month, or $27,144 a year. $26,220 ÷ $27,144 = 0.97.
A ratio of 1.0 means the property earns its loan payment exactly and nothing beyond it. Below 1.0 the rent does not cover the debt and the shortfall comes from the borrower. Minimum ratios are a lender-by-lender term rather than a market constant, so the floor that matters is the one written in the term sheet.
A DSCR of 0.97 on this duplex is the direct arithmetic of a 7% loan against a 6.2% cap rate. Whenever the borrowing rate sits above the cap rate, DSCR lands near or below 1.0 at ordinary leverage, and only three levers move it: more cash down, longer amortization, or a lower price.
Amortization changes the ratio without changing the debt. The same $340,000 at 7% stretched to 40 years pays about $2,113 a month, which lifts DSCR from 0.97 to 1.03. The loan balance did not shrink. The payment got spread thinner.
DSCR is built on NOI, so capital expenditures are already excluded. A property sitting at exactly 1.0 covers its mortgage and has nothing left for a furnace. The ratio can be satisfied while the deal still runs out of cash.
A DSCR loan qualifies the property rather than the borrower, which is why this one ratio carries the underwriting weight. Personal income documentation drops out of the file and the rent roll has to carry it.
DSCR = Net Operating Income ÷ Annual Debt Service. With $26,220 of NOI against $27,144 of annual principal and interest, the ratio is 0.97. Use the full payment, not interest only, or the ratio comes out flattering and wrong.
Above 1.0, with the specific minimum set by the individual lender and the loan program rather than by any market-wide rule. The requirement also moves with rates and credit conditions, so the number to work from is the one in your term sheet.
The property does not produce enough income to cover its own debt service, and the owner funds the difference each month. At 0.97 on this duplex, that gap is $924 a year.
Property taxes and insurance are operating expenses, so they are already subtracted inside NOI. They do not belong in debt service, which is principal and interest only. Counting them twice is the most common error in a DSCR calculation.
Raise NOI, lower the payment, or lower the price. In practice the payment is the fastest lever: a larger down payment or a longer amortization both cut annual debt service without touching the property.
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