Debt Service Coverage Ratio (DSCR)

What Is the Debt Service Coverage Ratio?

The debt service coverage ratio (DSCR) measures whether a rental property brings in enough money to pay its mortgage. “Debt service” means the yearly loan payments of principal and interest. The Office of the Comptroller of the Currency, a federal bank regulator, describes the ratio as net operating income divided by annual debt service, a measure of a borrower’s ability to repay.

Net operating income (NOI) is what a property earns after the bills are paid but before the mortgage: gross rents and other income, minus an allowance for vacancies, minus operating costs such as maintenance, insurance, property taxes, management, and reserves.

How It Works

The formula is simple:

DSCR = Net operating income ÷ Annual debt service

Lenders set a minimum DSCR and then work backward to size the loan. The largest annual payment a lender will allow equals NOI divided by the required ratio. Properties with steady, predictable income can qualify at lower ratios. Riskier income streams usually require higher ones.

The Federal Housing Administration (FHA) publishes minimums for the multifamily loans it insures. Mortgagee Letter 2025-03, issued January 8, 2025, and effective immediately, changed them for the Section 221(d)(4) and Section 223(f) programs. The minimum for market-rate properties fell from 1.176 to 1.15. For affordable properties using Low-Income Housing Tax Credits with rents below market, it fell from 1.15 to 1.11. Properties where at least 90% of units have rental assistance stayed at 1.11.

Example

Suppose an apartment building has NOI of $300,000 a year. If its lender requires a DSCR of 1.20, the maximum annual mortgage payment is $250,000 ($300,000 ÷ 1.20). Now suppose the same building restricts rents for workforce households and its NOI drops to $240,000. The supportable payment falls to $200,000, and the loan shrinks with it.

Why It Matters for Workforce Housing

Rent restrictions lower NOI, and a lower NOI supports less private debt. That is the central arithmetic of affordable and workforce housing finance. The gap between what a project costs and what its mortgage can cover is filled with tax-credit equity, public grants, or below-market “soft” loans that are often repaid only from surplus cash flow. Understanding DSCR explains why restricted-rent projects almost always need more than one funding source. See how affordable housing gets financed for the full picture.