Real Estate Glossary | What is Debt Coverage Ratio??

Q: What is Debt Coverage Ratio?

The debt coverage ratio (DCR) is a measure of a borrower's ability to repay a loan. It is calculated by dividing the net operating income (NOI) of a property by the debt service (the total amount of principal and interest payments due on a loan). The higher the DCR, the more financially secure the borrower is considered to be, and the more likely they are to be approved for a loan. For example, if a borrower has an NOI of $50,000 per year and a debt service of $40,000 per year, their DCR would be 1.25 ($50,000 / $40,000). This indicates that the borrower has a strong ability to cover their debt payments, as their NOI is 25% higher than their debt service.

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