Debt Service Coverage Ratio (DSCR)

To get the debt service coverage ratio, a lender divides net operating income by a year of loan payments, meaning principal plus interest. NOI is the numerator. Commercial lenders usually require 1.20 to 1.25, meaning the property earns 20 to 25% more than its payment, and they size the loan to hit that floor.

With $28,892 of NOI, a lender wanting 1.25 coverage allows about $23,114 of annual debt service, or $1,926 a month. At 7.25% over 30 years that supports a loan of roughly $282,000, about 56% of the $500,000 price. Buy with 25% down instead and the $375,000 loan costs $30,698 a year, a DSCR of 0.94, which a commercial lender would decline.

Residential DSCR lenders use a different formula, gross rent divided by the full payment including taxes and insurance, and the same house scores around 1.22 on that test. Know which version a lender means before comparing quotes. The Wikipedia article covers the commercial definition and its use in corporate lending as well.