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Understanding DSCR Calculation

The Debt Service Coverage Ratio (DSCR) is a critical metric used by lenders to evaluate a property's ability to generate sufficient income to cover its debt obligations. This ratio provides a clear picture of the property's financial health and its capacity to service its debt through operating income.

DSCR is calculated by dividing a property's Net Operating Income (NOI) by its total debt service:
DSCR = Net Operating Income / Total Debt Service
For example, if a property generates $120,000 in annual NOI and has annual debt payments of $100,000, its DSCR would be 1.20, indicating that it generates 20% more income than needed to cover its debt obligations.

DSCR vs Traditional Financing

DSCR Loans

  • Property cash flow based
  • Quick approval process (2-3 weeks)
  • No tax returns needed
  • Asset-focused underwriting
  • Multiple property financing
  • No employment verification
  • Flexible entity structures
  • Higher leverage options
  • Portfolio loan options

Traditional Loans

  • Personal income based
  • Longer approval time (45+ days)
  • Full documentation required
  • Borrower-focused underwriting
  • Limited property financing
  • Strict employment history
  • Limited entity options
  • Conservative leverage
  • Single property focus

Common Features

  • Property collateral required
  • Credit check needed
  • Property appraisal
  • Insurance requirements
  • Title insurance

Frequently Asked Questions

Everything you need to know about DSCR loans

What is a DSCR loan?

A DSCR loan is a type of commercial real estate financing that qualifies borrowers based on the property's income rather than personal income.

How is DSCR calculated?

DSCR is calculated by dividing the property's Net Operating Income (NOI) by its total debt service. For example, if NOI is $100,000 and annual debt service is $80,000, DSCR would be 1.25.

What's the minimum DSCR required?

Most lenders require a minimum DSCR of 1.25, though requirements can vary by property type and location.

What property types qualify?

Most stabilized commercial and investment properties qualify, including multi-family, office, retail, and industrial properties.

What documentation is needed?

Required documents include rent rolls, lease agreements, property operating statements, purchase contract (if applicable), and property insurance.

How long is the approval process?

DSCR loans typically close within 2-4 weeks, significantly faster than traditional financing.

What are typical loan terms?

Terms typically range from 5-30 years, with both fixed and adjustable rate options available.

Are there minimum credit score requirements?

Yes, most lenders require a minimum credit score of 640-680, though requirements vary by lender and loan program.

What is the maximum loan-to-value ratio?

Maximum LTV ratios typically range from 75-80% for most property types, though some programs may offer higher LTVs.

Can I get a DSCR loan for multiple properties?

Yes, many lenders offer portfolio DSCR loans that allow financing multiple properties under one loan.

Are there prepayment penalties?

Some DSCR loans include prepayment penalties, typically declining over the first 2-5 years of the loan.

How is rental income calculated?

Rental income is typically calculated using actual lease agreements or market rent analysis for vacant properties.

Can foreign investors apply?

Yes, many DSCR loan programs accept foreign investors, though terms and requirements may vary.

Is personal income verified?

No, DSCR loans focus on property income rather than personal income verification.

What expenses are included in NOI calculation?

NOI includes all operating expenses such as property taxes, insurance, maintenance, utilities, and management fees.

Can I refinance an existing property?

Yes, DSCR loans can be used to refinance existing properties based on their current income and value.

Are there reserve requirements?

Most lenders require 6-12 months of debt service reserves, though requirements vary by program.

What are typical interest rates?

Interest rates are typically 1-2% higher than conventional loans, reflecting the reduced documentation requirements.

Can I use a DSCR loan for construction?

No, DSCR loans are only available for stabilized properties with existing cash flow. Construction projects require different types of financing such as construction loans or development financing.

How often is the DSCR reviewed?

DSCR is typically reviewed annually, though some lenders may require quarterly updates for larger loans.