DSCR at 1.25 means something different depending on who is doing the math
A property generating 2,400 a month in rent against a 1,920 monthly debt service hits exactly 1.25, and most DSCR lenders will take that loan. What changes the picture is whether the lender is using gross rent, effective gross income after vacancy, or a stressed rent figure they derive from a third-party rent schedule. Three different inputs, same ratio target, three different loan outcomes on the same property. I have seen illustrative cases where a borrower qualifies at one shop and gets turned away at another on identical numbers, and the only variable is how the denominator is built, specifically whether the lender folds in taxes, insurance and HOA into the debt service figure or treats PITIA as the full load versus principal and interest alone. That gap matters more than the rate spread the borrower spent a week negotiating. From a debt fund perspective, the DSCR floor also tells you something about how the fund is managing expected loss in a softening rent environment. A fund underwriting to 1.20 with gross rents in a market where vacancy has been ticking up is carrying a thinner cushion than the coupon suggests, because the first thing that moves when a tenant leaves is the numerator, and the debt service does not adjust with it. The ratio that looked like a 15 percent buffer at origination can become a covenant breach inside one lease cycle. What DSCR does not capture at all is borrower liquidity, and that is the variable that actually determines whether a missed month becomes a default or a phone call. So when you are reading a fund's loan tape and it shows 94 percent of positions at or above 1.25, the question worth asking is what rent figure went into that calculation and when it was last updated relative to current market rents in each submarket. Is the fund re-underwriting those ratios annually, or is origination DSCR the number that stays in the file?
