DSCR Example

 
What does Debt Service Coverage Ratio (DSCR) mean and how do I calculate it?

Also known as Debt Service Coverage Ratio (DSCR). The debt coverage ratio (DSCR) is a widely used benchmark which measures an income producing property's ability to cover the monthly mortgage payments. The DSCR is calculated by dividing the net operating income (NOI) by a property's annual debt service. Annual debt service equals the annual total of all interest and principal paid for all loans on a property. A debt coverage ratio of less than 1 indicates that the income generated by a property is insufficient to cover the mortgage payments and operating expenses. For example, a DSCR of .9 indicates a negative income. There is only enough income available after paying operating expenses to pay 90% of the annual mortgage payments or debt service. A property with a DSCR of 1.25 generates 1.25 times as much annual  income as the annual debt service on the property. In this example, the property creates 25% more income (NOI) than is required to cover the annual debt service.
 
Example: 
We are considering buying an investment property with a net operating income of $24,000 and annual debt service of $20,000. The DSCR for this property would be equal to 1.2.  This means that it generates 20% more annual net operating income than is required to cover the annual mortgage payment amount.
                                                        Net Operating Income = $24,000
                Debt Coverage Ratio  =  -----------------------------------------------   =  1.2 
                                                        Annual Debt Service = $20,000
 
DSCR requirements may vary based on the loan program, property type, and the borrower’s profile from as low as 1.0 to as high as 1.5. From an underwriter’s perspective, the higher the debt service coverage ratio value, the more income there is available to cover the debt service and thus less risk.
 
 
 
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