What does a "debt service coverage ratio" (DSCR) measure?

The debt service coverage ratio (DSCR) is a financial metric used primarily to assess a borrower's ability to service debt obligations. It measures the relationship between a borrower's net operating income and their total debt service (which includes all principal and interest payments due on loans). When calculating DSCR, a ratio greater than 1 indicates that the borrower generates sufficient income to cover their debt payments, while a ratio below 1 suggests that the borrower's income is insufficient to meet their debt service requirements.

This measurement is crucial when lenders evaluate the creditworthiness of borrowers, particularly for commercial real estate or investment properties. A strong DSCR reassures lenders that borrowers can maintain their debt payments even during fluctuations in income, which reduces the risk of default.

The other choices do not accurately capture the essence of what the DSCR measures; for instance, while the amount of income (the total income a borrower has) is part of the calculation, it does not reflect the specific relationship between income and debt obligations that the DSCR emphasizes. Similarly, the total debt of a borrower and the amount of equity in a property do not relate to the borrower’s capacity to make debt payments based on their income. Therefore, focusing on the relationship expressed by the DSCR is what