The basic DSCR formula
DSCR = annual net operating income ÷ annual debt service.
If a property produces $150,000 of lender-accepted NOI and the proposed mortgage requires $120,000 of annual principal and interest, the modeled DSCR is 1.25×. That means the property produces $1.25 of NOI for each $1.00 of modeled debt service.
Why your DSCR may differ from the lender's
The formula is simple; the inputs are not. A lender may adjust gross rent, vacancy, management fees, repairs, utilities, insurance, property taxes, replacement reserves or non-recurring income. It may also use a qualifying interest rate or amortization different from the term sheet.
- Income: Confirm whether the lender uses current rent, in-place leases, market rent or a stabilized schedule.
- Vacancy and collection loss: Compare the property assumption with current market evidence and actual operating history.
- Expenses: Normalize missing, owner-paid and unusually low items instead of relying only on the seller's total.
- Debt service: Use the lender's qualifying rate and amortization when available.
How DSCR changes loan capacity
When DSCR is the binding constraint, the maximum annual mortgage payment is approximately NOI divided by the required coverage ratio. That payment is then converted into a loan amount using the modeled rate and amortization. A lower price does not automatically solve a coverage problem unless it also reduces the requested loan.
| Change | Typical DSCR effect |
|---|---|
| Verified rent increase | Improves DSCR if the additional income is accepted |
| Higher recurring expenses | Reduces NOI and DSCR |
| Higher interest rate | Raises debt service and reduces DSCR |
| Longer amortization | Lowers scheduled payments and improves modeled DSCR |
| Lower proposed loan | Lowers debt service and improves DSCR |
Stress the ratio before relying on it
Run at least three downside cases: a rate increase, lower collected rent and higher operating expenses. The most useful question is not whether the base case passes—it is how quickly the property loses its coverage cushion when one assumption changes.
Size the loan against LTV, DSCR and debt yield together. CapShark shows the binding constraint, cash required and downside cases.
Open Multifamily AnalysisPrimary sources and limitations
CMHC describes debt coverage as part of its multi-unit mortgage insurance framework and publishes current rental-market evidence. Review the current standard rental housing guidance and Rental Market Report. Lender policies and program requirements can change. This article is an educational underwriting aid, not a loan quote or financing commitment.