Debt Service Coverage Ratio (Investment Property)
The Debt Service Coverage Ratio (DSCR) is a financial metric used by lenders to determine a borrower’s ability to pay back a loan. It is calculated by dividing the net operating income (NOI) of a property or business by the total debt service (TDS) of the loan. The resulting ratio tells the lender how much of the borrower’s income is available to cover the loan payments.
A DSCR of 1.0 or higher is generally considered to be a good sign for the borrower, as it indicates that the borrower’s income is sufficient to cover the loan payments. Lenders will look for a higher DSCR when evaluating loan applications, as it indicates a lower risk of default. However, the required DSCR can vary depending on the type of loan and the lender’s risk tolerance.