Glossary Term
Debt-Service Coverage Ratio (DSCR)
What is Debt-Service Coverage Ratio (DSCR)?
Debt-Service Coverage Ratio (DSCR) is a financial metric used by lenders to evaluate a borrower’s ability to generate sufficient income to cover their debt obligations. It is especially important in commercial and real estate lending, as it provides a clear picture of a property’s or borrower’s financial health and risk level.
How DSCR is Calculated
The formula for calculating DSCR is:
DSCR = Net Operating Income (NOI) ÷ Total Debt Service
Where:
Net Operating Income (NOI): The income generated by a property after operating expenses, but before debt payments.Total Debt Service: The total of all required debt payments, including principal and interest.For example, if a property generates $120,000 in NOI annually and the total debt service is $100,000, the DSCR would be:
DSCR = $120,000 ÷ $100,000 = 1.2
A DSCR of 1.2 means the borrower generates 20% more income than needed to cover their debt obligations.
Why DSCR Matters
DSCR is a critical metric for lenders and borrowers alike:
For Lenders: DSCR helps assess the risk of lending. A higher DSCR indicates a borrower has a strong ability to repay their debt, reducing default risk.For Borrowers: A good DSCR improves loan approval chances and may lead to better terms, such as lower interest rates or reduced collateral requirements.Typical DSCR Requirements
DSCR requirements vary depending on the type of loan and lender policies:
For residential investment properties, a DSCR of 1.25 or higher is often required.For commercial properties, lenders may require a DSCR of 1.2 to 1.5, depending on the asset class and market conditions.Improving DSCR
Borrowers can take steps to improve their DSCR, including:
Increasing rental income by optimizing tenant mix or raising rents.Reducing operating expenses through efficient property management.Refinancing to secure lower interest rates or extend loan terms, reducing debt service.DSCR in Private Lending
In private lending, DSCR is a key factor in underwriting decisions for rental property loans and commercial real estate financing. At LYNK Capital, we understand the importance of this metric and offer lending solutions tailored to meet the needs of borrowers with strong income-generating properties.
Contact us today to learn how DSCR can influence your financing options and how we can help you achieve your investment goals.
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