Default

Default is a borrower's failure to meet the terms of a loan, most often by missing payments. Lenders set a DSCR minimum because the ratio predicts default risk: the less rent exceeds the payment, the less room there is for a vacancy or a repair bill before a payment is missed.

At a DSCR of 1.20 on a $3,330 payment, the property earns about $670 a month more than it owes. A single month of vacancy uses up about six months of that margin. At 1.00 there is no margin at all, and any lost rent has to come from the owner's pocket.

A loan can also go into technical default without a missed payment, for example by breaking a covenant, letting insurance lapse or transferring the property without consent. Continued default leads to acceleration and, eventually, foreclosure.

Further reading: Default on Wikipedia.