Debt-Service Coverage Ratio (DSCR)

A Debt-Service Coverage Ratio (DSCR) loan is a specific type of loan that businesses can use to finance the purchase of multifamily and commercial real estate.

DSCR loans are unique in that they are based on the amount of cash flow a business generates each month compared to the amount of debt service payments the business must make.

In the commercial context, DSCR is used by lenders to determine whether a property will produce enough income to cover the monthly debt payments. This allows businesses with less-than-stellar credit ratings or insufficient collateral to secure financing.

Here’s what you need to know about DSCR loans if you’re planning to apply for real estate financing:

Defining Debt Service Coverage Ratio (DSCR)

Before diving into the specifics of DSCR loans, it is important to understand what exactly DSCR is and why it is important.

Your debt service coverage ratio is defined as the “ratio” of cash available to “service” your debt.

In other words, it is a metric used to determine the amount of cash you have available to pay both the principal and the interest payments for your loan.

The ratio itself compares the target property’s net operating income (NOI) with the target mortgage debt service on an annualized basis (more on this below).

Your DSCR is important because it gives lenders valuable information about whether you (as the borrower) have access to enough cash flow to service your debt. A high enough DSCR provides some security to the lender that you’re unlikely to default on your loan payments.

How To Calculate Your DSCR

Calculate your DSCR by dividing the net operating income (NOI) of your property by the debt service of the loan (assessed on an annual basis).

Find your net operating income by subtracting all the reasonably necessary operating expenses of your property from the revenue that it generates.

The mathematical formula for calculating your DSCR = NOI ÷ DEBT SERVICE

Why Does DSCR Matter?

Your Debt Service Coverage Ratio matters because it is a financial metric that provides lenders with important information about the risk they assume with each loan they make.

The DSCR signals to lenders whether a borrower will be able to pay their debts for a commercial or multifamily property.

A higher DSCR will also give you more leverage (i.e. bargaining power) with your lender.

What Is A “Good” DSCR?

Most business lenders require their borrowers to have a DSCR ratio higher than 1.00. In fact, the minimum for most lenders is typically around 1.25.

A DSCR ratio of 1.00 means that the cash flow generated from the property in question will be exactly enough to service the borrower’s loan.

A DSCR ratio of 1.25 means that the borrower will be able to service their loan, with some added cushion.

DSCR Loans: How They Work

Borrowers can use DSCR loans to finance multiple different property types, including:

  • Multifamily properties
  • Single Family properties
  • Commercial office spaces
  • Hotels and resorts
  • Private mortgages

The minimum DSCR number that lenders will allow will depend on the macroeconomic conditions. In a growing economy, lenders might be more willing to offer DSCR loans despite a lower DSCR number.

To avoid exposure to property types they might deem risky, some lenders only offer DSCR loans for certain types of property.

Golden Lenders offer loans with limits up to $100,000,000.

Debt-Service Coverage Ratio In Colorado, Florida, Texas

We’re fully commited to helping you purchase the property of your dreams. Our Debt-Service Coverage Ratio is one of many tools we use to help our clients.

Contact Us

Contact Golden Lenders today for the mortgage help you need to turn your dream house into reality. We provide attentive customer service throughout the process of obtaining a loan for your new home. We serve clients across Colorado, Florida, Nebraska, & Texas.

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