Debt Service Coverage Ratio (DSCR)
The DSCR: Understanding Why Your Loan Applications are Rejected and How We Can Help
As a home owner, you have applied for several home loans for making new purchases or refinancing existing mortgages. Lenders have accepted some of the applications and rejected others. Have you ever stopped for a minute and wondered how the lender reaches the final decision?
The Debt Service Coverage Ratio (DSCR)
DSCR is one of the tools financiers use to decide whether you can manage to repay the loan. This ratio is equivalent to the debt-to-income ratio used in residential financing.
In simple terms, the DSCR refers to the amount of debt that you can support using cash flow generated by your property. Calculation of this figure utilizes income and expenses derived from the commercial property.
Calculating the DSCR
You arrive at this figure by dividing the net income divided by the new commercial mortgage payment. Here is an illustration of how a lender calculates DSCR using your details.
Gross rent 50,000
Other income 10,000
Total annual gross income 60,000
Less 5% vacancy and collection loss 3,000
Effective gross income 57,000
Less operating expenses 7,000
Net operating income 50,000
Assuming the annual payments add up to 46,000
DSCR = 50,000/46,000 = 1.1
A result of 1.1 means that your cash flow can cover the loan by 1.1. A figure of 1.0 is termed a breakeven point. Anything lower than 1.0 means that your property is delivering a net operating loss, meaning you cannot manage to pay off the loan.
How Can We Help?
Each lender has a specific DSCR that you need to meet before you qualify for a loan. At Mixed Use Mortgage, we help you understand your DSCR and how to calculate it. We also help you get a lender who can give you a loan at your current DSCR.
Don’t hesitate to give us a call and discuss your options, consultation is free and never a fee.