Debt Service Coverage Ratio (DSCR) is a financial ratio that lenders and investors use to evaluate the ability of a borrower to meet their debt obligations. It provides an indication of the borrower’s cash flow and their capacity to service their debt.
The DSCR is typically calculated by dividing the borrower’s net operating income (NOI) by the total debt service. The net operating income represents the revenue generated from the borrower’s operations minus the operating expenses. Total debt service refers to the borrower’s total debt obligations, including interest payments and principal repayments.
The formula for calculating DSCR is as follows:
DSCR = Net Operating Income / Total Debt Service
Lenders often have a minimum DSCR requirement that borrowers must meet to qualify for a loan. A DSCR of 1.0 indicates that the borrower’s cash flow is just enough to cover their debt obligations, while a DSCR greater than 1.0 indicates that there is a surplus of cash flow, providing a cushion for the borrower.
A higher DSCR is generally considered more favorable by lenders, as it indicates a lower risk of default and a greater ability to meet debt payments. Lenders may have specific DSCR requirements based on factors such as the type of loan, industry norms, and risk appetite.
It’s worth noting that different lenders may use variations of the DSCR calculation, and they may also consider additional factors in their assessment of a borrower’s creditworthiness.
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