How to Calculate Debt Service Coverage Ratio

A key component in making an underwriting evaluation of a commercial property is the debt service coverage ratio.

The DSCR is defined as the yearly debt payment compared to the adjusted gross income of the property in question, or:

The Debt Service Coverage Ratio = Net Operating Income divided by Debt Service

By using a DSCR of 1:1.15, a lender is saying that they are looking for $1.15 in net income for each $1.00 mortgage payment. Typically a lender will determine the DSCR ratio based on annual figures, the yearly mortgage payment compared to the yearly net borrower income. The higher the DSCR ratio is, the more conservative the lender will be. Most lenders will never go below a 1:1 ratio (a dollar of debt payment per dollar of income available). At a 1:1 ratio, a property is breaking even. Anything less than a 1:1 ratio means the potential borrower is in a negative cash flow situation, thus raising the risk for the lender.

DSCRs are set by property type and what a lender perceives the risk to be. Today, apartment properties are considered to be the least risky category of investment lending. As such, lenders are more inclined to use smaller DSCRs when evaluating a loan request. Your Coast Investors loan officer can assist you with understanding the DSCR policies of each of the loan programs we offer.

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