DSCR
DSCR is NOI divided by annual debt service. A 1.25x DSCR means the building's NOI is 25% larger than the mortgage payment. Lenders typically require 1.20x to 1.30x on multifamily. The ratio drives both how big a loan you qualify for and what rate you'll get.
Debt service coverage ratio is the most common metric multifamily lenders use to size loans. It answers a simple question: how comfortably does this building's income cover the loan payment?
The math
DSCR equals NOI divided by annual debt service. NOI is the building's income after operating expenses but before debt service. Annual debt service is principal plus interest payments for the year (you can compute it from the loan amortization).
If a 24-unit building produces $200,000 of NOI and the proposed loan has $150,000 in annual debt service, the DSCR is 1.33x. Income covers payment by 33%.
If the same property had $190,000 of debt service, DSCR would be 1.05x. Income just barely covers payment, with very thin margin for vacancy or expense surprises. Most lenders won't write that loan.
What lenders typically require
Conventional multifamily lending standards in 2025-2026 generally land in this range:
- Agency lenders (Fannie / Freddie): 1.25x minimum, often higher for value-add
- Bank balance-sheet lenders: 1.25x to 1.35x minimum
- CMBS: 1.20x to 1.25x at origination
- Bridge / value-add lenders: willing to go to 1.10x or lower with a clear reposition story
Higher DSCR means lower risk to the lender, which usually translates to better rates and terms.
DSCR loans (the consumer product)
In the last few years, "DSCR loans" have become a marketed product for individual investors buying small multifamily and SFR rentals. They underwrite to property cash flow rather than borrower income, which makes them useful for self-employed buyers and portfolio investors. The required DSCR varies by lender (1.0x to 1.25x is the typical range) and the rates are higher than full-doc agency multifamily.
Why DSCR matters in a sale
When a seller is negotiating with a buyer, DSCR shows up in two ways:
- Buyer financing capacity. A buyer who can only qualify at 1.30x DSCR has a hard ceiling on price relative to NOI. If the lender's DSCR math doesn't work, the buyer can't close at the asking price even if they want to.
- Seller financing alternative. When bank-DSCR math is tight, seller financing often unlocks a deal. The seller can underwrite to whatever DSCR they're personally comfortable with, which is typically more flexible than a CMBS shop's underwriting committee.
How Kallpa thinks about DSCR
When we model an acquisition, we run two DSCR scenarios:
- Cash deal: No DSCR concern. The constraint is our return target, not lender math.
- Seller-financed deal: We underwrite to a DSCR that protects the seller as lender. Typical: 1.30x or better at the proposed note rate. We share the math so the seller knows their note is well-covered.
If the deal can't pencil at honest DSCR with realistic NOI, we walk. Lender-imposed DSCR floors aren't bureaucratic; they exist because thin coverage actually does default in soft markets.
Related