DSCR Interview Questions for REPE: Formulas, Sizing, and Stress

DSCR is the real estate coverage ratio interviewers expect cold. If you only know LTV, you are half-ready. Lenders often size loans to the tighter of LTV and DSCR constraints. Your job is to define it, size with it, and stress it without freezing.

The short answer

"DSCR is debt service coverage ratio: NOI divided by annual debt service (interest plus mandatory principal). A 1.25x DSCR means NOI is 25% above debt service. Lenders set minimum DSCR covenants and often size the loan so that at underwritten NOI, DSCR clears their floor."

DSCR = NOI ? Debt Service
Debt Service ? Interest + Mandatory Principal Amortization
(confirm whether reserves or CapEx are deducted in the lender's version)

Worked example

NOI = $2,500,000 Loan = $30,000,000 Interest rate = 6.0% interest-only

Debt service = 0.06 ? 30m = $1,800,000 DSCR = 2.5 / 1.8 = 1.39x

If the lender requires 1.25x minimum, you have cushion. If amortizing debt service rises to $2,100,000, DSCR falls to 1.19x and may fail.

Narrate units carefully: annual NOI over annual debt service. If someone hands you monthly numbers, annualize before you speak.

Sizing with DSCR and LTV

Debt constant matters. On interest-only, constant ? rate. On amortizing debt, constant is higher because principal is included, so the same NOI supports a smaller loan at the same DSCR floor.

DSCR vs corporate interest coverage

Do not casually swap EBITDA for NOI. NOI is property-level after OpEx, before debt service and usually before CapEx/reserves depending on the lender form. Ask which NOI definition the term sheet uses: T12, forward, or underwritten.

Stress questions

1. Vacancy rises 300 bps: restated NOI and DSCR?
2. Rates reset +150 bps on floating debt?
3. Interest-only period ends and amort begins?
4. What DSCR do you underwrite vs what the lender covenants?
5. Insurance or tax spike cuts NOI: coverage impact?

Exit / refi angle

Refi risk is often a DSCR and LTV story at the future rate and NOI. A deal can show strong levered IRR in the model and still face a refi gap if exit DSCR fails at market terms. Walk the takeout: forward NOI, then-market rate or constant, lender DSCR and LTV caps, max new loan vs old payoff.

Mini sizing drill you can do aloud

NOI $3.0m, min DSCR 1.25x, IO rate 5.5%. Max debt service = 3.0 / 1.25 = $2.4m. Max DSCR loan ? 2.4 / 0.055 ? $43.6m. If value is $60m and max LTV is 65%, LTV loan = $39m. LTV binds; proceeds $39m; implied DSCR on that loan is higher than 1.25x.

Common traps

1. Using interest-only math after amort starts
2. Mixing monthly and annual figures
3. Ignoring that CapEx reserves can sit outside the lender's DSCR NOI
4. Assuming today's rate at a future refi
5. Quoting DSCR without stating the NOI basis

How sponsors underwrite vs how lenders covenant

Sponsors often underwrite a higher DSCR than the covenant floor so there is room for vacancy, expense inflation, and rate moves. A lender might covenant 1.20x to 1.25x while your investment committee wants 1.30x to 1.40x on stabilized NOI. Say both numbers: "Covenant is 1.25x; we underwrite 1.35x at takeout." That sentence sounds like someone who has sat in a debt process.

Floating-rate deals need an extra beat: current DSCR on SOFR-plus-spread today is not the DSCR that matters if the rate cap expires or the refinance assumes a higher constant. Cap costs and reserves can also change cash flow available to equity even when NOI is flat.

Verbal structure when they hand you a sheet

1. State NOI and which period
2. State debt service components (rate, IO vs amort, balance)
3. Compute DSCR
4. Compare to floor
5. Name the binding sizing constraint with LTV
6. Offer one stress (vacancy or rates)

Keep it under a minute unless they ask for the full size-up. If numbers are missing, ask for NOI basis and amort schedule before inventing precision.

25-second verbal

"DSCR is NOI over debt service. I use it to size loans with LTV and to test covenant headroom when vacancy, rates, or amort change. The binding constraint is whichever of LTV and DSCR allows less proceeds."

Practice

Use Project Sunbelt and DSCR, LTV, and Debt Sizing. Shock NOI -10% and recalculate DSCR out loud. Pair with Refi Risk for takeout stress.