The Debt Service Coverage Ratio is one of the most important factors commonly used by commercial lenders as the benchmark to determine whether a property's cash flow will support the loan request

It is equivalent to debt to income ratios ( DTI's ) in residential lending. However, rather than using your personal income, we analyze the income and expenses derived from the commercial property. We determine the amount of debt that can be supported by the cash flow generated from the property, or the net income generated by the property divided by the new commercial mortgage payment.

To calculate a property's debt coverage ratio, you first need to determine the property's net operating income. To do this you must take the property's total income and deduct any vacancy amounts and all operating expenses, then divide it by annual debt service which is the total amount of all interest and principal paid on all of the loans throughout the year .

Different commercial property types have different debt service coverage ratio requirements, but most lenders require the minimal DSCR of 1.2 .   A DSCR of 1.2 simply means that your property's cash flow is generating at least 1.25 times the annual debt service on your property. Coverting this to dollars means that for every dollar that you are spending towards your debt payments, you are bringing in $1.25 in. This would imply that you have more than enough net cash to support your mortgage payment.