• Questionnaire
  • Save

Whether it's for business or personal use, getting denied for a loan is frustrating. The two biggest reasons for a denial are poor credit and not enough income.

The lender has to follow several rules set by the federal government when it comes to your credit, but how do they determine debt to income ratio? In finance, it's called debt service coverage ratio.

To figure out yours, use our DSCR calculator. If you want to learn more, we've gone over everything you need to know about DSCR in the Q&A below.


What is a debt service coverage ratio (DSCR)?

In the corporate world, the debt service coverage ratio is the comparison of a business's cash flow to its debt obligations.

In personal finance, the DSCR determines whether a lender will approve your mortgage loan.

Figuring out your DSCR gives you an indicator of whether you should pay down your current debt before submitting new loan paperwork.

What is the DSCR formula?

The formula for calculating DSCR is net operating income divided by total service debt.


  • NOI = Net operating income
  • TDS = Total debt service

Why use a DSCR calculator?

A debt service coverage ratio calculator will take human error out of the equation. Because the numbers are sensitive to the approval process, you need to make sure your DSCR is exact.

This can help you prepare for the loan process and give valuable insight on where you stand. Depending on your situation, the DSCR calculator determines your likelihood of getting approved or denied for a loan.

How does a DSCR calculator work?

A DSCR calculator works by calculating the figures for you to arrive at your debt service coverage rate. To use a DSCR calculator, you will need to know a few key details and terms:

  • New loan amount - The amount of the loan you're applying for

  • Amortization in years - How long you'll pay the loan

  • Interest rate - The interest percentage you'll pay on the loan broken down into a monthly amount

  • Net operating income - Referred to as EBITDARM

  • Provision for management costs - This is money set aside for management costs. This number should be at least 5% of your total revenue.

  • Provision for capital expenditure - This is money set aside for capital. This provision determines the capital requirement for ongoing operations.

The end result is your debt service coverage rate.

What is net operating income?

In real estate, net operating income (NOI) is a term used to evaluate the ability of a property to generate income. In corporate finance, it's the business's income minus expenses.

Lenders use EBITDA (earnings before interest, taxes, depreciation, and amortization) as the equivalent of NOI in finding debt service coverage ratio.

How do I figure out my NOI?

To begin, you need to find your annual net income, which is gross revenue minus all expenses including EBITDA.

For example, if your company's gross revenue is $1,000,000, you subtract:

  • Rent: $80,000
  • Payroll: $200,000
  • Inventory: $60,000
  • Marketing: $60,000
  • Taxes: $250,000
  • Interest Payments: $80,000
  • Depreciation: $40,000
  • Amortization: $20,000

That all equals an annual net income of $270,000

Now, you add back in taxes, interest, depreciation, and amortization:

  • Taxes: $250,000
  • Interest Payments: $80,000
  • Depreciation: $40,000
  • Amortization: $20,000

The final number is the annual net operating income (EBITDA) = $660,000. The NOI is $660,000 which is the figure you'll use when calculating your DSCR.

What is total debt service?

Total debt service (TDS) is a company or individual's current debt obligations. This includes interest and principal paid on loans, and lease payments. On your balance sheet, this is short-term debt and your current portion of long-term debt (CPLTD).

In simple terms, your CPLTD is the part of a loan you're paying within the current year.

You find your total debt service you must include all debt obligations, including:

  • Bank loans
  • Online loans
  • Invoice financing
  • Business lines of credit
  • Business credit cards
  • Short-term loans
  • Current portion of long-term debt
  • Real estate leases
  • Equipment leases

To determine your TDS, you must add up all monthly debt obligations.

What is an acceptable DSCR?

In general, DSCR is based on two numerical factors: one or greater and less than one. If the variable is one or greater, the business has enough cash flow to cover the principal and interest on the loan.

If the number is less than one, the borrower has negative cash flow and isn't able to repay the loan without borrowing money from another source.


If a business's DSCR is 1.55, the lender determines they have enough cash flow to cover current debt obligations and repayment of the loan they're applying for.

If the debt service coverage ratio is 0.90, the lender determines the company doesn't have enough cash flow to repay the loan. In other words, the business only has 90% of the funds needed for repayment.

Yet, if the lender knows the company has strong outside resources, they could allow a negative DSCR to pass approval.

If the number is too close to 1, like 1.20, the loan officer could consider it "vulnerable." This means if there's a reduction in a business's cash flow, it's possible the debt won't get paid.

What's an example of a DSCR?

Using the predetermined factors already figured in this article:

The loan amount is $500,000 with a 7.5% interest rate, and the amortization is 10 years. The NOI is $660,000 (as we already determined) and there's $1,500 in management costs and $2,300 in capital expenditure.

The monthly payment would be $5,935.09 and the EBITDA is $658,500. That makes the income available for debt service $656,200.

The debt service coverage ratio is 9.21%, well above the 1% needed to get the loan approved.

Debt service coverage ratio is easier to explain then it is to figure out. That's why your safest bet is to use a DSCR calculator.

Tell your friends about us!