Real-Life Examples Section
Example scenario:
Net operating income (NOI): $150,000
Annual debt service: $100,000
Monthly debt service: $8,333
Target DSCR: 1.25
Calculations:
DSCR: $150,000 ÷ $100,000 = 1.50
Cash flow after debt service: $150,000 – $100,000 = $50,000
DSCR assessment: Strong (≥1.50)
Loan eligibility: Excellent
FAQs
1. What is DSCR?
DSCR stands for Debt Service Coverage Ratio. It measures a property’s or business’s ability to cover debt payments with net operating income. It is calculated as NOI ÷ Annual Debt Service.
2. How is DSCR calculated?
DSCR = Net Operating Income ÷ Annual Debt Service. For example, $150,000 NOI ÷ $100,000 debt service = 1.50 DSCR.
3. What is a good DSCR?
A good DSCR is 1.25 or higher for most lenders. A DSCR of 1.50+ is considered strong. Below 1.0 means negative cash flow and likely loan denial.
4. What is the minimum DSCR for a loan?
Most lenders require a minimum DSCR of 1.25 for commercial mortgages and investment properties. Some lenders may accept 1.20 with compensating factors. SBA loans may require 1.15.
5. What is the difference between DSCR and LTV?
DSCR measures income coverage of debt. LTV measures loan amount relative to property value. Both are important for loan approval. DSCR focuses on cash flow; LTV focuses on equity.
6. What is the difference between DSCR and debt-to-income ratio?
DSCR is used for investment properties and commercial loans. DTI is used for residential mortgages. DSCR focuses on property income; DTI focuses on personal income.
7. What happens if my DSCR is below 1.0?
If DSCR is below 1.0, the property does not generate enough income to cover debt payments. Lenders will likely deny the loan. You may need more down payment or additional income.
8. How can I improve my DSCR?
Increase NOI by raising rents or reducing expenses. Reduce debt service by refinancing at lower rates or extending loan terms. Increase down payment to reduce loan amount.
