Resources - Financial Terms
The Debt Coverage Ratio (DCR) is a benchmark which measures an income producing property's ability to cover the monthly mortgage payments. The DCR is calculated by dividing the net operating income (NOI) by a property's annual debt service.
Annual debt service equals the annual total of all interest and principal paid for all loans on a property.
Debt Coverage Ratio = Net Operating Income/ Annual Debt Service
Many lending institutions require a minimum debt coverage ratio value to procure a loan for income producing properties. The higher the debt coverage ratio value the more available income to cover the debt service, and thus the less the risk.Lenders use the debt coverage ratio to determine if an income producing property has sufficient income to cover the operating expenses and debt service. To acquire a loan for an income producing property, the debt coverage ratio must usually be greater than 1.1. A debt coverage ratio of less than 1 indicates that the income generated by a property is insufficient to cover the mortgage payments and operating expenses.
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