“DSCR” stands for “Debt Service Coverage Ratio.” It is a financial metric used by lenders to assess the creditworthiness of a borrower, particularly in the context of a loan application. The Debt Service Coverage Ratio calculates the borrower’s ability to meet their debt obligations, specifically the loan payments, based on their income and other cash flow sources.
The formula for calculating DSCR is: DSCR = (Net Operating Income) / (Debt Service)
- Net Operating Income (NOI) represents the income generated by a property or business after deducting operating expenses but before considering any debt service (loan payments).
- Debt Service refers to the required loan payments, including principal and interest, over a specific period (usually a year).
A higher DSCR indicates a better ability to cover debt obligations, which is favorable for the borrower and reduces the lender’s risk. Typically, lenders prefer a DSCR above 1.25 to 1.5 to ensure sufficient cash flow to cover loan payments comfortably. However, we have multiple lenders that will go below that number given the right scenario.
It’s important to note that the specific requirements and considerations for DSCR may vary depending on the type of loan, the lender’s policies, and the industry in which the borrower operates.
Keep in mind that the lending criteria and guidelines can change, so it’s always best to check to be up to date. Contact our team for the most up-to-date information regarding DSCR requirements and if this product might be right for you!