Which statement best describes DSCR?

• A. A higher DSCR means a greater cash flow available to cover debt service
• B. A higher DSCR means a higher loan-to-value
• C. DSCR does not affect loan terms
• D. A higher DSCR indicates a riskier loan

Answer: (A)

The concept here is what DSCR, the Debt Service Coverage Ratio, actually measures. DSCR compares the cash flow a property generates (net operating income) to the annual debt payments (debt service). A higher DSCR means there is more cash flow available relative to the debt payments, creating a bigger cushion to cover those payments if revenues dip. For example, if NOI is $150,000 and annual debt service is $100,000, the DSCR is 1.5, meaning $50,000 of cushion.

This is why the statement about a higher DSCR being associated with more cash flow available to cover debt service is the best description. It directly ties the ratio to the ability to meet debt obligations and the safety margin lenders look for. DSCR relates to risk, so a higher DSCR generally signals a safer loan, and lenders may offer better terms or allow a larger loan for a stronger DSCR.

The other ideas don’t fit. DSCR does not describe loan-to-value, which is a comparison of loan amount to property value, a different metric. DSCR does affect loan terms—lenders often use it to determine what terms they’re willing to offer. And a higher DSCR indicates lower, not higher, risk to the lender.