What is the Debt Service Coverage Ratio (DSCR) and why do lenders care about it for investment property loans?

The debt service coverage ratio equals net operating income divided by total annual debt service (principal plus interest). A DSCR of 1.25 means the property generates 25% more income than needed to service the debt. Most lenders require a minimum DSCR of 1.20 to 1.25 for investment property loans. A DSCR below 1.0 means the property has negative cash flow before even accounting for capital expenditures. DSCR-based loans (popular with investors) qualify borrowers based on the property's income rather than the borrower's personal income, making them attractive for investors with many properties or non-traditional income.