WHAT
IS DEBT SERVICE COVERAGE RATIO
(DSCR)?
The
debt service coverage ratio (DSCR)
is a widely used tool for lenders
to evaluate the ability for a
property's income to cover the
monthly and annual debt service
The
DSCR is calculated by dividing
the Net Operating Income (NOI)
by the annual debt service.
The
annual debt service is equal
to the total of all of the payments
of principal and interest paid
in that year, for the loan on
the property.
A
debt service coverage ratio
of less than 1 indicates inadequate
coverage; the cash flow generated
by the property is less than
the mortgage payments. DSCR
of .95 indicates negative cash
flow. There is only enough cash
flow to pay 95% of the mortgage
payment.
Conversely,
a DSCR of 1.25 generates cash
flow that is 25% more than that
required to pay a mortgage payment.
| You
are considering an investment
property with a Net Operating
Income (NOI) of $24,000
and an annual debt service
of $20,000. The DSCR is
1.20. The property generates
20% more cash flow than
required to make the mortgage
payments. |
|
Net
Operating Income $24,000 |
|
Debt
Service Coverage
Ratio (DSCR) =
|
_____________________=
1.20 |
|
Annual
Debt Service $20,000 |
|
| Most
Lenders require a minimum
DSCR to approve a loan.
The DSCR for many institutions
may vary greatly. We've
seen 1.0 to 1.35 depending
upon creditworthiness, property
value, etc. |
|
