DSCR stands for Debt Service Coverage Ratio. A DSCR mortgage is a type of loan where the lender evaluates the borrower's ability to repay the mortgage based on the property's cash flow, rather than solely relying on the borrower's personal income.
In traditional mortgages, the lender primarily assesses the borrower's ability to repay the loan based on their income, credit score, and other financial factors. However, in DSCR mortgages, the primary focus is on the property's income-generating potential.
The Debt Service Coverage Ratio (DSCR) is a financial metric used by lenders to evaluate the income-generating capacity of an income-producing property, such as a rental property or commercial real estate. It measures the property's ability to cover its debt obligations, including the mortgage payments.
The DSCR is calculated as follows:
DSCR = Net Operating Income (NOI) / Total Debt Service
Where:
For example, if a property generates $100,000 in NOI annually and the annual mortgage payments are $80,000, the DSCR would be 1.25 ($100,000 / $80,000). In this case, the property's income is 1.25 times its debt obligations, indicating that it generates enough income to cover its debt payments and still have some buffer.
Lenders typically have specific DSCR requirements for different types of properties and loans. For example, a lender might require a DSCR of at least 1.25 or 1.30 to approve a DSCR mortgage. A higher DSCR indicates a lower risk for the lender, as the property's income is more than sufficient to cover its debt obligations. However, a NO ratio options are avaibale at higer loan cost.
DSCR mortgages are commonly used in commercial real estate financing, where the property's income potential is a crucial factor in determining the loan amount and terms. It is also applicable for certain residential investment properties or multifamily properties, where the rental income is a significant consideration for loan approval.
