Debt service coverage ratio (DSCR) loans are designed for rental property investors who wish to leverage the income generated by their investment rather than their personal income to qualify for a loan. This guide delves into the specifics of this loan product, explaining what it is, how it works and the essential requirements you’ll need to meet to qualify for funding.
A DSCR loan is a long term mortgage product created exclusively for property investors. Loan amounts are determined by the income the property generates, not by personal income, as you’ll find with traditional mortgages.
Lenders want assurance that the income earned by the property is adequate to cover the monthly mortgage payments and operating expenses. So, it evaluates the debt service coverage ratio, computed by dividing the net rental income by the total debt service.
This figure indicates the level of risk the lender assumes by extending a loan to the real estate investor. A higher DSCR means the property generates sufficient income to comfortably cover the accompanying debt, which means far less risk. However, if the DSCR is low, the real estate investor may struggle to cover debt payments, making a DSCR loan more risky for the lender as the chance of default increases.
Components Required
Debt Service Coverage Ratio hinges on two key components: Net Operating Income (NOI) and Total Debt Service.
Here’s a breakdown of how to calculate the DSCR: