What Is Debt Service Coverage Ratio (DSCR)? And Its Importance

Abstract

What Is Debt Service Coverage Ratio? DSCR is a ratio that measures the cash flow available to pay the debt obligation on a commercial or investment property. If there are two identical properties with different owners and one owner financed at 75% loan to value with one interest rate and the other at 50% loan to value with a different interest rate, the DSCR will be different for both the properties even if they are identical with the same sales price. How Is Debt Service Coverage Ratio Calculated? Before we calculate the DSCR, we need to understand a few parameters that are required to know the DSCR for the property. Let's take an example here: An investor is looking to purchase an investment property where the property has an NOI of $550,000 per year and the total debt service is $200,000 per year. In a DSCR loan, the standard qualifying DSCR required is 1.25%. The best part DSCR loan is that the borrower does not need to submit any tax returns, pay stubs, or W2s. As long as the cash flow on the property is 1.25% or greater, the lender should be able to get your property qualified for a DSCR loan by providing the current lease agreement. The lenders providing this type of loan would also want to take a look at the total number of investment properties owned by the borrower to analyze the total aggregate cash flow that the borrower gets from all his rental properties as part of reserves. In a DSCR loan, the minimum down payment required is 20% compared to a conventional investment mortgage where the minimum down payment is 25%. Conclusion When it comes to investment property financing, the debt service coverage ratio plays a significant part in qualifying for a DSCR loan.