The definition, precisely
DSCR is net operating income divided by annual debt service. A property earning $1,100,000 of NOI against $880,000 of annual loan payments covers at 1.25× — a 25% cushion before income fails to service the debt. At 1.00× every dollar of income goes to the lender; below 1.00× the deal feeds the loan from reserves or fresh equity.
The convention: 1.20–1.25×, with asterisks
For stabilized multifamily, the market converges on a minimum of roughly 1.20× to 1.25×: agency lenders (Fannie Mae and Freddie Mac programs) typically underwrite to 1.25× for standard deals, banks and credit unions often accept 1.20–1.25×, and debt funds or bridge lenders will go lower (1.00–1.15× going-in) on a value-add story — priced accordingly, with reserves and a clear path to stabilized coverage. Affordable programs, small markets, and anything with operational hair push the floor up, not down.
The binding constraint rule: your loan is sized by whichever bites first — DSCR or LTV. In a high-rate environment, DSCR almost always bites first: the proceeds that satisfy 1.25× coverage are often well below 75% of value. Solving for maximum proceeds at a required DSCR is the calculation that actually sets your equity check.
NOI-basis vs NCF-basis: the quiet haircut
Agency credit committees do not divide NOI by debt service — they divide net cash flow (NCF), which is NOI minus replacement reserves, typically $250–$300 per unit per year. On a 104-unit property that’s roughly $26,000 of NOI that vanishes from the numerator before coverage is computed. A deal that covers 1.27× on NOI can be a 1.24× NCF deal — under the 1.25× wire. When a term sheet says “1.25× DSCR,” always ask: on NOI or on NCF?
Same deal, two coverage answers — 104 units
The interest-only flattery
An IO period shrinks the payment, which inflates coverage: the same loan that covers 1.45× interest-only may cover 1.22× once amortization kicks in. Lenders see through this — agency sizing uses the amortizing payment even during IO years. Quote both numbers and know which one the term sheet means; a deal marketed on its IO coverage is a deal that gets repriced in committee.
Stress it like a credit committee
Three stresses reveal whether coverage is real or decorative:
- Income off 5–10%. One bad lease-up season or a soft submarket. If 1.25× becomes 1.05× on a 7% revenue haircut, the cushion was thinner than the headline implied.
- Exit-refi coverage. The year-five buyer (or your own refinance) must service debt at then-current rates on then-current NOI. A deal that only pencils if rates fall is a rate bet wearing a real-estate costume.
- Taxes and insurance at your basis. Reassessed property taxes and a current insurance quote — not the seller’s T-12 lines — belong in the NOI before coverage is computed. (This is the same trap covered in how to read a T-12.)
Debt yield: the lender’s second lens
Increasingly, lenders pair DSCR with debt yield — NOI divided by loan amount — because it cannot be flattered by low rates or long amortization. A 10% debt yield floor (common for bridge and CMBS) means a $1,100,000 NOI supports at most $11,000,000 of proceeds, full stop. When rates are low, debt yield bites; when rates are high, DSCR bites. Underwrite both and you will never be surprised by a proceeds cut.
The bottom line
Target 1.25× on the agency’s NCF basis with the amortizing payment, confirm coverage survives a 5–10% income stress and a realistic exit rate, and check the debt yield floor. In Nivora, both DSCR bases (NOI and NCF), debt-yield, breakeven occupancy, and DSCR-constrained loan sizing are computed on every change — and the live sample deal will show you the coverage math on real engine output right now.
Want to run your own numbers first? Try the free DSCR calculator and loan-sizing calculator.
See it computed, not explained.
Every concept on this page is a number Nivora computes live — the real engine is running on a fictional 104-unit sample deal right now, no login required.