A DSCR loan (Debt Service Coverage Ratio loan) is a type of loan where the lender evaluates the borrower’s ability to repay the loan based on the Debt Service Coverage Ratio (DSCR). The DSCR is a financial metric that compares a property’s or business’s annual net operating income (NOI) to its annual debt obligations.
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Key Points of a DSCR Loan:
- DSCR Formula: DSCR = Net Operating Income (NOI) / Total Debt Service
Where:
-
- Net Operating Income (NOI): This is the income generated from the property or business after deducting operating expenses but before deducting taxes and interest.
- Debt Service: This refers to the total annual debt obligations (including both principal and interest payments) on the loan.
- Net Operating Income (NOI): This is the income generated from the property or business after deducting operating expenses but before deducting taxes and interest.
- DSCR Ratio Interpretation:
- A DSCR of 1.0 means the borrower generates just enough income to cover their debt payments.
- A DSCR greater than 1.0 (e.g., 1.2) means the borrower has more income than needed to cover debt obligations, which is a positive sign for lenders.
- A DSCR less than 1.0 (e.g., 0.8) indicates that the borrower does not generate enough income to cover debt obligations, which presents a higher risk for the lender.
- A DSCR of 1.0 means the borrower generates just enough income to cover their debt payments.
Importance of DSCR in Loan Approval:
- Risk Assessment: Lenders use the DSCR to gauge whether the borrower is likely to default on the loan. A higher DSCR suggests lower risk since the borrower is generating sufficient income to meet debt payments.
- Loan Terms: A borrower with a high DSCR may be eligible for better loan terms, such as lower interest rates, while a borrower with a lower DSCR might face higher rates or more stringent terms.
The DSCR for this loan is
Monthly Payments
Principal & Interest (P&I)
$
Taxes & HOA
$
Homeowners Insurance
$
Debt Service Coverage Ratio
(Rental Income / Mortgage Payment)
Rental Income
$3,000
Monthly Mortgage
$3,000
DSCR
0.90
Estimated Taxes & Insurance
Property taxes are generally estimated to be 1.2% of the home's value, but may vary based on your location. Annual homeowners insurance is roughly 0.35% of the home's value but can change based on insurer. Your loan specialist can help you determine property tax and insurance rates in your area.
Estimated Payment
$ /mo
Loan amount
$
Down payment
$
Interest rate
Loan term
Property tax
Homeowner's insurance
$
HOA dues
$
Payment Breakdown
Amortization
Principal vs. Interest
Amortization Schedule Breakdown
Our detailed amortization schedule breaks down your mortgage payments, showing how they are split between interest and principal over the life of your loan.
Note: The actual monthly payment may be higher than what is shown here, as this schedule does not account for variable costs such as property taxes and home insurance, which are often included in your total mortgage payment.
- Principal payments: $$240,000 (the amount borrowed)
- Interest payments: $$297,554 (the cost of borrowing)
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