Debt service coverage ratio (DSCR) compares a property's income with its loan payments. It answers one question: does the property earn enough to pay its own debt, and with how much room to spare?
DSCR = net operating income ÷ annual debt service
A rental produces net operating income of $24,000 a year. Principal and interest on the loan come to $1,600 a month, so annual debt service is $19,200. DSCR is $24,000 ÷ $19,200 = 1.25. The property earns 25% more than it needs to make its loan payments. At 1.00 the income exactly covers the payments, and below 1.00 you make up the shortfall from your own pocket.
Lenders use DSCR to help decide how much they will lend. Many look for about 1.20 to 1.25 or higher, though the minimum varies by lender and loan type. Be careful about which version you are quoting. Many DSCR loan programs for small rentals use a different ratio: monthly rent divided by the full monthly payment including taxes, insurance and any HOA dues, often with no deduction for vacancy or repairs. The same property can score differently under each method, so ask your lender how they calculate it before you rely on a number.