What does the debt service coverage ratio (DSCR) indicate?

The debt service coverage ratio (DSCR) is a critical financial metric used primarily in real estate and mortgage lending. It measures a property's ability to generate enough income to cover its debt obligations, specifically the principal and interest payments on loans. A positive DSCR indicates that the property's income exceeds its debt obligations, making it more likely that the borrower can fulfill their payment responsibilities.

Typically, a DSCR greater than 1.0 suggests that the property generates enough income to pay the debt, while a ratio below 1.0 indicates a potential shortfall where income may not fully cover debt service. This ratio is essential for lenders when assessing risk and determining whether to approve a loan. A strong DSCR can often lead to better financing terms for the borrower.

Other options mentioned pertain to different financial metrics. The total income generated by a property refers to gross revenue but does not specifically evaluate the relationship between income and debt. The ratio of total equity to total debt is more indicative of the leverage position of the property owner rather than their immediate capacity to meet debt payments. The percentage of income spent on housing costs typically applies to personal finance rather than investment properties and does not serve as a direct measure of cash flow concerning debt obligations.