Skip to content
What is a DSCR Loan?

What is a DSCR Loan?

A DSCR loan stands for Debt Service Coverage Ratio loan. It is a type of loan typically used in commercial real estate financing. The Debt Service Coverage Ratio (DSCR) is a financial metric used by lenders to assess the ability of a property’s income to cover its debt obligations, including principal and interest payments.

Here’s how it works:

Debt Service Coverage Ratio (DSCR): The DSCR is calculated by dividing the property’s net operating income (NOI) by its total debt service (principal and interest payments). The formula is:

DSCR = Net Operating Income / Total Debt Service

Loan Considerations: In the context of a DSCR loan, lenders typically require a certain minimum DSCR as a condition for loan approval. This ratio ensures that the property generates sufficient income to cover its debt obligations comfortably.

Risk Assessment: A higher DSCR indicates a lower risk for lenders because it means that the property’s income is more than sufficient to cover its debt obligations. Conversely, a lower DSCR suggests a higher risk because there may be insufficient income to cover the debt payments.

Loan Terms: Lenders may offer more favorable loan terms, such as lower interest rates or longer repayment periods, to borrowers whose properties have higher DSCRs. This is because higher DSCRs indicate a lower risk of default.

DSCR loans are common in commercial real estate financing, where the income generated by the property is a critical factor in determining its ability to service its debt. Lenders use the DSCR as a key metric to evaluate the financial health and risk associated with a potential loan.