This Debt Service Coverage Ratio (DSCR) Calculator is an essential tool designed to assess if your incoming cash flows are adequate for repaying debts. It’s widely utilized by commercial lenders to evaluate if a loan can yield a satisfactory return on investment for the borrower. Having a good DSCR ratio means that the properties Net Operating Income (NOI) is high enough to comfortably cover debt servicing (the mortgage), to an extent that a lender will underwrite a loan while often ignoring traditional lender criteria, such as the buyers debt-to-income ratio or credit score.

You’re invited to use this DSCR Calculator immediately or continue reading for an in-depth guide on calculating DSCR and interpreting its implications.

Understanding DSCR

Debt Service Coverage Ratio (DSCR) is an important metric in commercial lending, where the size and scale of investments make them ineligible for traditional lending options or personal guarantees linked to an individuals ability to repay the loan. For example, to receive a loan for a four million dollar apartment complex, few investors would be able to cover the loan payments with personal earned income from either a job or business ventures. For this reason, banks allow for the rental income that the property generates to count towards the investors ability to cover the periodic loan payments, or to exclusively cover these payments with no consideration for the investors financial situation. In the commercial lending space, properties must be able to cover debt servicing using their own operating income. The DSCR also can apply to smaller real estate transactions, if an individual has grown their portfolio beyond a size that allows for traditional lending options, due to either the amount of debt and assets owned or the sheer complexity of their capital structure. DSCR gauges whether an investment is economically viable by comparing cash flows to debt obligations. Unlike personal purchases, commercial investments aim to generate income. For instance, a real estate agent purchasing a building for rental purposes must ensure that the rental income not only covers the loan and interest but also yields profit. Lenders prioritize projected cash flows over credit history to confirm the borrower’s capability to fulfill payment obligations.

Calculating DSCR

Where: DSCR is the Debt Service Coverage Ratio, Net Operating Income represents the Monthly Net Operating Income, and Total Debt Service encompasses the monthly payments for debt repayment (Principal + Interest).

Minimum DSCR for Loan Approval

Lenders typically set a minimum DSCR threshold of 1.25 for loan consideration. A higher DSCR accelerates loan approval, while values below this threshold may lead to application rejection. A DSCR of 1.25 would mean that after all debt servicing is completed, a 25% surplus of cash exists. A 1.50 DSCR signifies that the property’s income comfortably covers the debt service and generates additional income, with 1.00 covering the loan and 0.50 representing surplus income.

How to Calculate a DSCR Loan?

1. Obtain the Net Operating Income (NOI). Example: $5,000.
2. Sum up your Total Debt Service (e.g., Mortgage: $2,500).
3. Apply the DSCR formula. A DSCR of 1.25 or higher is generally required.

Down Payment Requirements for a DSCR Loan?

Down payments for DSCR loans vary, typically starting at 20% or higher.