Debt service coverage asks whether this period’s operating income covers the year’s loan payments.
HUD’s debt service coverage briefing writes DSCR as net operating income divided by the sum of the annual loan payments. A ratio below 1.0 means that income does not cover those payments. HUD’s income approach keeps debt service out of net operating income. Principal and interest stay in the debt-service box.
The debt service coverage calculator uses that split:
Net operating income = revenue − operating expenses
DSCR = net operating income ÷ annual debt service
Cash after debt service = net operating income − annual debt service
Debt service coverage ratio is a property or a business test on the numbers you type. Household debt payments divided by personal pay are the debt-to-income calculator. The DTI post is that household version. Operating profit as a share of revenue is the operating margin post. Months of cash left when spending outruns receipts are the cash runway post.
A ratio under 1 is a shortfall on this formula. HUD defines that line. A lender’s minimum above 1 is their covenant. These examples show the arithmetic.
Fig 1
Income first, then the payments
Debt service stays out of operating expenses
Subtract operating expenses from revenue. Divide that income by the year's loan payments. Subtract the payments to see the cash left.
What the multiple is counting
Above 1, operating income is larger than the payments. The cash-after line is positive. At 1, they match and cash after the payments is zero. Under 1, the payments are larger and the cash-after line is negative. Example 3 is under 1. Example 7 lands on exactly 1.
Leave the loan out of operating expenses. Example 5 puts it in both boxes and the ratio drops from 1.71× to 0.71× on the same shop.
Example 1: the calculator defaults
Inputs:
- revenue: $240,000
- operating expenses, debt service left out: $168,000
- annual debt service: $42,000
Net operating income: 240,000 − 168,000 = $72,000.00
DSCR: 72,000 ÷ 42,000 = 1.7143, shown as 1.71×
Cash after debt service: 72,000 − 42,000 = $30,000.00
Calculator result
Debt service coverage ratio
- Revenue
- $240,000.00
- Operating expenses (exclude debt service)
- $168,000.00
- Annual debt service
- $42,000.00
1.71×
debt service coverage
- Net operating income
- $72,000.00
- Annual debt service
- $42,000.00
- Cash after debt service
- $30,000.00
Income covers the payments, with $30,000 left. Operating expenses are 168,000 ÷ 240,000 = 70% of revenue. The payments are 42,000 ÷ 240,000 = 17.5%. The leftover is 30,000 ÷ 240,000 = 12.5%.
Fig 2 · 1/3
Where the $240,000 of revenue goes
Defaults. Debt service is not inside the expense slice.
Operating expenses
$168,000
Debt service
$42,000
Cash after payments
$30,000
Operating expenses take $168,000.
Payments take $42,000. Cash left is $30,000.
Example 2: thin cover
Inputs: revenue $180,000, operating expenses $140,000, debt service $36,000.
Net operating income: 180,000 − 140,000 = $40,000.00
DSCR: 40,000 ÷ 36,000 = 1.1111, shown as 1.11×
Cash after debt service: 40,000 − 36,000 = $4,000.00
The ratio is above 1. The cash left is $4,000 on $180,000 of revenue, which is 4,000 ÷ 180,000 = 2.2% of the top line. A small expense miss changes the story. Another $4,000 of expenses would drop income to $36,000 and the ratio to 36,000 ÷ 36,000 = 1×.
Example 3: income does not cover the payments
Inputs: revenue $150,000, operating expenses $120,000, debt service $48,000.
Net operating income: 150,000 − 120,000 = $30,000.00
DSCR: 30,000 ÷ 48,000 = 0.625, shown as 0.63×
Cash after debt service: 30,000 − 48,000 = −$18,000.00
Calculator result
Debt service coverage ratio
- Revenue
- $150,000.00
- Operating expenses (exclude debt service)
- $120,000.00
- Annual debt service
- $48,000.00
0.63×
debt service shortfall
- Net operating income
- $30,000.00
- Annual debt service
- $48,000.00
- Cash after debt service
- -$18,000.00
The page labels this a debt service shortfall. The payments are short by $18,000. HUD’s line for a ratio under 1.0 is this case: operating income does not cover the scheduled payments. This ratio is the income statement against the loan.
Example 4: what if the loan payment rises
Hold Example 1’s revenue and expenses. Income stays $72,000.00. Change annual debt service from $42,000 to $60,000.
DSCR: 72,000 ÷ 60,000 = 1.2×
Cash after debt service: 72,000 − 60,000 = $12,000.00
The payment rose by 60,000 − 42,000 = $18,000.00. Cash after the payments fell by that same $18,000, from $30,000 to $12,000. The ratio fell from 1.71× to 1.2×. The shop still covers the new payment. The cushion is smaller.
The same income against a ladder of payments:
| Annual debt service | DSCR | Cash after payments |
|---|---|---|
| $30,000 | 2.4× | $42,000 |
| $42,000 | 1.71× | $30,000 |
| $54,000 | 1.33× | $18,000 |
| $60,000 | 1.2× | $12,000 |
| $72,000 | 1× | $0 |
| $84,000 | 0.86× | −$12,000 |
72,000 ÷ 30,000 = 2.4. 72,000 ÷ 54,000 = 1.3333, shown as 1.33×. 72,000 ÷ 84,000 = 0.8571, shown as 0.86×. The income line never changes. Coverage is the payment.
Fig 3 · 1/6
Coverage as the payment rises
Net operating income stays $72,000.
DSCR
- DSCR
| Point | DSCR |
|---|---|
| $30k | 2.4 |
| $42k | 1.7 |
| $54k | 1.3 |
| $60k | 1.2 |
| $72k | 1 |
| $84k | 0.9 |
A $30,000 payment is 2.4× coverage.
An $84,000 payment is 0.86×. The $72,000 payment lands on 1×.
Example 5: the mistake of putting the loan in operating expenses
Hold Example 1, then add the $42,000 of debt service to operating expenses as well. Expenses become 168,000 + 42,000 = $210,000. Debt service stays $42,000.
Net operating income: 240,000 − 210,000 = $30,000.00
DSCR: 30,000 ÷ 42,000 = 0.7143, shown as 0.71×
Cash after debt service: 30,000 − 42,000 = −$12,000.00
Calculator result
Debt service coverage ratio
- Revenue
- $240,000.00
- Operating expenses (exclude debt service)
- $210,000.00
- Annual debt service
- $42,000.00
0.71×
debt service shortfall
- Net operating income
- $30,000.00
- Annual debt service
- $42,000.00
- Cash after debt service
- -$12,000.00
The loan was counted twice. Income fell by the full $42,000, from $72,000 to $30,000. A 1.71× cover becomes a 0.71× shortfall. HUD’s income approach leaves principal and interest out of net operating income. Put them only in the debt-service box.
Example 6: a smaller rental
Inputs: revenue $96,000, operating expenses $36,000, debt service $28,000.
Net operating income: 96,000 − 36,000 = $60,000.00
DSCR: 60,000 ÷ 28,000 = 2.1429, shown as 2.14×
Cash after debt service: 60,000 − 28,000 = $32,000.00
Income is smaller than Example 1’s $72,000. Coverage is higher, because the loan is $28,000 instead of $42,000. 60,000 ÷ 72,000 = 0.833, so this income is five sixths of the default income, and the payment is 28,000 ÷ 42,000 = two thirds of the default payment. The ratio rises. Cash left is $32,000 against Example 1’s $30,000.
Example 7: coverage of exactly 1
Inputs: revenue $200,000, operating expenses $150,000, debt service $50,000.
Net operating income: 200,000 − 150,000 = $50,000.00
DSCR: 50,000 ÷ 50,000 = 1×
Cash after debt service: 50,000 − 50,000 = $0.00
The payments fit the income and nothing is left. The next dollar of expense, or the next dollar of payment, pushes the ratio under 1. A 1× result is the boundary in HUD’s definition.
Example 8: an owner draw typed as an expense
Hold Example 1 and add a $36,000 owner draw to operating expenses. Expenses become 168,000 + 36,000 = $204,000. Debt service stays $42,000.
Net operating income: 240,000 − 204,000 = $36,000.00
DSCR: 36,000 ÷ 42,000 = 0.8571, shown as 0.86×
Cash after debt service: 36,000 − 42,000 = −$6,000.00
The draw is not an operating cost on HUD’s income line. With it in the expense box, a 1.71× cover becomes a 0.86× shortfall. Income fell by the whole $36,000. Take the draw out when you want the lender-style net operating income. Leave it in only when you want the cash that also paid the owner, and label it that way. Example 1 is the operations figure. This one is operations after the draw.
Example 9: extra principal on top of the required payment
Required principal and interest stay $42,000, as in Example 1. You also send $12,000 of extra principal. Cash sent to the loan is 42,000 + 12,000 = $54,000.
If the debt-service box is the required payment only, the result is Example 1: 1.71×, cash after the required payment $30,000.00. The extra $12,000 then comes out of that $30,000, and $18,000 remains.
If you type $54,000 as debt service, because you want the cash that left:
DSCR: 72,000 ÷ 54,000 = 1.3333, shown as 1.33×
Cash after debt service: 72,000 − 54,000 = $18,000.00
HUD’s ratio uses the required loan payments. Extra principal is a choice. Use $42,000 for the required-payment coverage. Use $54,000 when the question is cash left after what you sent. The two answers are 1.71× and 1.33× on the same income.
Example 10: an operating loss
Inputs: revenue $80,000, operating expenses $92,000, debt service $18,000.
Net operating income: 80,000 − 92,000 = −$12,000.00
DSCR: −12,000 ÷ 18,000 = −0.6667, shown as −0.67×
Cash after debt service: −12,000 − 18,000 = −$30,000.00
Expenses already exceed revenue by $12,000 before the loan. The payments add another $18,000 of cash out. The ratio is negative because income is negative. A ratio under 1 includes this case and Example 3’s positive income that is still too small. Read the income line, not only the multiple. Here the income line is −$12,000.
A larger year, for scale. Inputs: revenue $480,000, operating expenses $290,000, debt service $120,000.
Net operating income: 480,000 − 290,000 = $190,000.00
DSCR: 190,000 ÷ 120,000 = 1.5833, shown as 1.58×
Cash after debt service: 190,000 − 120,000 = $70,000.00
The multiple is close to Example 1’s 1.71×. The dollars are not. Cash left is $70,000 instead of $30,000. Compare ratios when the question is cover. Compare the cash-after line when the question is what remains in the account.
Fig 4 · 1/5
Cash left after the payments
Five cases where income covers the debt service you type.
Cash after debt service
Default
$30,000
Thin
$4,000
Payment reset
$12,000
Rental
$32,000
Larger year
$70,000
The default year leaves $30,000.
The larger year leaves $70,000. Thin cover leaves $4,000.
The results side by side
| Example | Revenue | Expenses | Debt service | Income | DSCR | Cash after |
|---|---|---|---|---|---|---|
| 1. Defaults | $240,000 | $168,000 | $42,000 | $72,000 | 1.71× | $30,000 |
| 2. Thin | $180,000 | $140,000 | $36,000 | $40,000 | 1.11× | $4,000 |
| 3. Shortfall | $150,000 | $120,000 | $48,000 | $30,000 | 0.63× | −$18,000 |
| 4. Payment to $60,000 | $240,000 | $168,000 | $60,000 | $72,000 | 1.2× | $12,000 |
| 5. Loan in expenses | $240,000 | $210,000 | $42,000 | $30,000 | 0.71× | −$12,000 |
| 6. Rental | $96,000 | $36,000 | $28,000 | $60,000 | 2.14× | $32,000 |
| 7. Exactly 1 | $200,000 | $150,000 | $50,000 | $50,000 | 1× | $0 |
| 8. Draw in expenses | $240,000 | $204,000 | $42,000 | $36,000 | 0.86× | −$6,000 |
| 9. Extra principal | $240,000 | $168,000 | $54,000 | $72,000 | 1.33× | $18,000 |
| 10. Operating loss | $80,000 | $92,000 | $18,000 | −$12,000 | −0.67× | −$30,000 |
| 10. Larger year | $480,000 | $290,000 | $120,000 | $190,000 | 1.58× | $70,000 |
Examples 5 and 8 put something in operating expenses that HUD’s income line leaves out. Example 5 is the loan. Example 8 is the draw. Example 9 is the same income with the extra principal either in the ratio or beside it.
Type the required payment when you want the coverage test. Type the cash you sent when you want cash left. Near-cash against bills due this year is the quick ratio post.