A Debt Service Coverage Ratio (DSCR) loan is a type of mortgage commonly used by real estate investors to purchase or refinance rental properties. It’s designed to assess the property’s ability to generate enough income to cover its debt obligations, including principal, interest, taxes, and insurance (PITI). To make it simple…. Rent covers the PITI.

PITI EXPLAINED:

Principal: The actual amount of money you borrowed from the lender to purchase the home.
Interest: The fee your lender charges you for borrowing the money.
Taxes: Local and state property taxes, which are generally divided by 12 and paid into an escrow account so the lender can pay them on your behalf.
Insurance: Homeowners insurance to protect the property. This is also typically bundled into your monthly escrow payment.

To calculate the DSCR, you divide the property’s net operating income (NOI) by its total debt service (PITI). The formula looks like this:

DSCR=Net Operating Income (NOI)Total Debt Service (PITI)DSCR=Total Debt Service (PITI)Net Operating Income (NOI)​

Here’s a breakdown of the key components and considerations:

1. Net Operating Income (NOI): This is the income generated by the property after deducting operating expenses but before deducting mortgage payments and income taxes. It typically includes rental income minus vacancies, property taxes, insurance, maintenance, and property management fees.
2. Total Debt Service (PITI): This encompasses all the monthly mortgage-related expenses, including principal, interest, property taxes, and insurance.
3. Desired DSCR Ratio: A DSCR of 1.0 indicates that the property’s income exactly covers its debt obligations, leaving no room for unexpected expenses or vacancies. A DSCR greater than 1.0 means the property generates more income than needed to cover debt payments, which is generally preferred by lenders. A commonly accepted minimum DSCR for lenders is 1.25, meaning the property generates 25% more income than the required debt payments.

For example, if a property has an NOI of $10,000 per month and its PITI is $8,000 per month, the DSCR would be calculated as follows:

DSCR=$10,000/ $8,000=1.25DSCR

This means the property generates 1.25 times the income needed to cover its debt obligations.

Properties eligible for DSCR loans typically include 1-4 unit residential properties, 5-8 unit multifamily properties and Mixed Use non owner occupied.

When seeking a DSCR loan, factors such as credit score (typically 660 or higher), usable funds in the bank, and the property’s ability to meet the DSCR ratio are considered for approval. Additionally, down payment requirements for purchases and cash-out refinances are typically in the range of 15-25% of the purchase price, with cash-out refinances capped at 75% of the property’s value.

If you’re interested in obtaining a DSCR mortgage, please reach out to us and we would be glad to go over options.