Real estate investors who are interested in nontraditional mortgages can choose from numerous options, but going into 2023, DSCR loans are incredibly popular. DSCR stands for debt service coverage ratio, and while it may sound complex, it simply describes the ratio between the amount of money a property generates versus the cost of the loan. Here’s everything you need to know about calculating your DSCR and qualifying for one of these increasingly popular loans. 

What Does Debt Service Coverage Ratio Mean?

If you’ve ever obtained a traditional mortgage for a primary residence, there’s a good chance that your lender used your debt-to-income ratio to determine your ability to make timely mortgage payments. Similarly, lenders use investors’ debt service coverage ratio to determine their ability to repay – all without the need to verify your employment, tax information, or paystubs. To put it as simply as possible, your debt service coverage ratio ultimately determines how much you can afford to pay in debt obligations based on the amount of income you generate from your investment properties. 

How to Calculate Your DSCR

Calculating your DSCR is as simple as dividing your net operating income by your debt service amounts. 

• Net Operating Income (NOI) – This is the pre-tax income you generate from your property less the operating expenses, which may include the taxes you pay, equipment purchases, amortization, and more. Capital expenditures are not figured into your NOI. 

• Debt Service – Debt service is the amount of cash you need to pay the principal and interest associated with a loan in a specified period. 

As an example, assume your NOI comes out to be $2,000,000 and your debt service is $400,000. When you divide the $2 million NOI by your $400,000 debt service, you get a result of 5. This is your DSCR, and it’s the number your lender will use to qualify you for a DSCR loan. 

Is There a Minimum DSCR to Qualify?

As with traditional mortgages, lenders have different requirements for their DSCR loans. It can be helpful to remember that if your DSCR result is 1, you have exactly enough revenue to cover your debt obligations. In the above example, a DSCR of 5 means that your NOI is enough to cover your debt service five times. Lenders want to be sure that borrowers have enough income to repay their debts, so most look for a DSCR of 2 or higher, but some can qualify you for a loan with a DSCR of as low as 1.25 depending on your unique circumstances. Aside from meeting qualification requirements, your specific DSCR may influence the amount you are authorized to borrow as well as the interest rate associated with your loan. 

If you are interested in a DSCR loan, United Lending LLC offers competitive rates, fast turnaround times, and friendly service. Contact us today and one of our loan officers will be in touch to help walk you through the application process.