DSCR: How Lenders Size a Commercial Mortgage
Educational guide from the Indi Mortgage Commercial Division team. General information, not financial advice.
When you apply for a mortgage on your home, the lender looks mostly at your income. Commercial financing works differently: for an income-producing property, the lender looks first at whether the property itself earns enough to comfortably cover the loan. The number they use to measure that is the debt service coverage ratio — DSCR — and it's usually the single biggest factor in how much you can borrow.
In short: DSCR is a property's net operating income divided by its annual mortgage payments. Most commercial lenders want a minimum of about 1.20–1.25, and DSCR frequently caps your loan amount before loan-to-value does.
What DSCR actually measures
DSCR compares a property's net operating income (NOI) to its annual mortgage payments (debt service):
DSCR = Net Operating Income ÷ Annual Debt Service
- Net operating income is the property's rental income after operating expenses — property taxes, insurance, management, maintenance, utilities, and a vacancy allowance — but before the mortgage.
- Annual debt service is the total of your mortgage payments over a year (principal + interest).
A DSCR of 1.25 means the property earns 25% more than it needs to cover the mortgage. A DSCR of 1.0 means it breaks even exactly — and most lenders won't go there, because there's no cushion for a vacancy or a major repair.
A worked example
Say a small apartment building produces $120,000 in net operating income a year, and the mortgage you're proposing would cost $96,000 a year in payments:
$120,000 ÷ $96,000 = 1.25 DSCR
That deal clears a typical 1.25 minimum. If the same building only produced $105,000 of NOI, the DSCR drops to 1.09 — and the lender would likely reduce the loan amount until the ratio climbs back to their minimum.
Why DSCR caps your loan amount
Here's the part that surprises a lot of first-time commercial borrowers: DSCR often sets your maximum loan before loan-to-value does. The lender takes the property's NOI, divides by their required DSCR to find the largest annual payment they'll allow, then works backward — using the interest rate and amortization — to the biggest loan that payment supports. On lower-income or lower-cap-rate properties, that DSCR-driven number can come in below the amount you'd expect from the purchase price and down payment alone.
Typical minimums:
- Conventional commercial: often 1.20–1.25
- CMHC-insured multi-unit (e.g., MLI Select): can allow lower coverage in exchange for meeting program criteria — one reason those programs support higher leverage.
How to strengthen your DSCR
If a deal is coming up short, there are usually a few levers:
- Increase NOI — bring below-market rents up, reduce vacancy, or trim operating costs before you finance.
- Longer amortization — spreading payments over more years lowers annual debt service and lifts DSCR.
- Larger down payment — a smaller loan means smaller payments.
- The right program — a CMHC-insured structure may qualify a deal that conventional terms won't.
See where your deal lands
You can model NOI, DSCR, and loan-to-value on your own deal in a couple of minutes with our commercial mortgage feasibility calculator — it shows you what the numbers support before you ever talk to a lender. And if you'd like a second set of eyes on the structure, our Halifax-based commercial team is happy to walk through it: (902) 298-0218.
Sources
- CMHC — Multi-unit mortgage loan insurance — insured programs allow lower debt-coverage minimums than conventional
Indi Mortgage Commercial Division — commercial mortgages, construction financing, and CMHC MLI Select across Halifax and Nova Scotia. This article is general information and not financial advice; every deal is different.