DSCR Below 1.25 — Can You Still Get a Commercial Loan in California?

DSCR — Debt Service Coverage Ratio — measures whether a commercial property's income is sufficient to cover its debt payments. The formula: net operating income divided by annual debt service on the proposed loan.

Net operating income is gross scheduled rent, minus vacancy allowance, minus operating expenses. Operating expenses include property management fees, insurance, property taxes, maintenance and repairs, and any other recurring costs of operating the property. What it does not include is the mortgage payment — that is what the DSCR measures against.

Annual debt service is 12 months of principal and interest on the proposed loan. If the lender is underwriting at a stress rate — typically the note rate plus 50 basis points — the annual debt service used in the calculation will be higher than the actual payment, creating a conservative cushion.

Example: A 12-unit multifamily in Los Angeles generates $180,000 in gross rent annually. After 5% vacancy and $45,000 in operating expenses, the NOI is $126,000. The proposed loan requires $110,000 in annual debt service. DSCR = $126,000 / $110,000 = 1.145x. A conventional bank requiring 1.25x declines. A lender going to 0.75x approves.

The 1.25x DSCR minimum originated in institutional commercial lending as a risk buffer. If a property is at 1.25x DSCR and vacancy increases by 10% or rents drop modestly, the property can still cover its debt service with room to spare. For stabilized, long-tenanted commercial assets with predictable income, 1.25x is a reasonable underwriting standard that protects the lender's position through market cycles.

The problem is that the commercial real estate market contains far more than fully stabilized, long-tenanted assets. Value-add multifamily in lease-up, mixed-use buildings between anchor tenants, light industrial with near-term lease rollovers, and NNN properties with below-market tenants — all of these may be strong investments with clear upside that simply do not hit 1.25x on current income. Conventional banks decline them all. That creates the market that stated income commercial lenders serve.

Yes — with the right lender and the right deal story. Fundscape, Wexmoor's primary stated income commercial lender, goes to 0.75x DSCR. This is not a niche edge case or a high-risk product. It is a lender that has built its underwriting specifically around transitional and value-add commercial assets, and prices the deal accordingly.

To qualify at sub-1.0x DSCR, the deal needs a clear and credible case for why the current income understates the asset's performance. Common scenarios: a multifamily property with below-market rents where leases are rolling over in the next 12 months, a retail property with a vacant anchor space that has a signed letter of intent from a new tenant, or a commercial property coming out of a major renovation where occupancy is ramping. In each case, the current DSCR is a point-in-time snapshot, not a reflection of where the asset will be in 18 months.

Generally yes — lenders price for risk, and lower DSCR represents more risk in the short term. The spread between a 0.80x DSCR deal and a 1.20x DSCR deal on the same property is typically in the range of 50–150 basis points, depending on the lender, the property type, and the borrower profile. That translates to roughly $5,000–$15,000 per year in additional interest cost on a $1M loan.

The more important consideration is the deal's return profile. If you are buying a value-add multifamily at a 6.5% cap rate on current income that will be an 8.5% cap rate on stabilized income, the value creation from lease-up or renovation is worth far more than the incremental rate premium. And once the property stabilizes, refinancing into a conventional DSCR loan at better pricing is the natural next step.

For most stated income commercial loans, the DSCR at origination determines qualification — there is no ongoing DSCR covenant that triggers a default if performance changes. Unlike some bank loans that include maintenance covenants, non-QM commercial loans typically do not. As long as you make your payments, a temporary dip in DSCR due to vacancy or expense increases does not put the loan in technical default.

That said, if DSCR deteriorates significantly and you need to refinance, the refinance lender will underwrite on current performance — not on what the property showed at the time of the original loan. Maintaining or improving DSCR over the hold period is important for long-term refinancing flexibility.

LTV and DSCR move together in commercial underwriting — the weaker the DSCR, the lower the LTV the lender will offer. At 0.75x DSCR, expect maximum LTV of 65–70%, meaning 30–35% down payment. At 0.90x DSCR, LTV can reach 70–75%. At 1.0x and above, some programs go to 75–80% LTV. These are not rigid rules — property type, market, and borrower profile all influence the final LTV — but they represent the general relationship between DSCR and leverage in the stated income commercial market.