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The Debt Service Coverage Ratio (DSCR) is an important financial metric that lenders use to determine the ability of a borrower to make their loan payments. If you are considering applying for a DSCR mortgage, it is essential to understand how to calculate your DSCR value. In this blog post, we will provide a step-by-step guide on how to calculate your DSCR and discuss why it is important for securing a mortgage.

What is Debt Service Coverage Ratio (DSCR)?

The Debt Service Coverage Ratio (DSCR) is a financial metric used by lenders to evaluate a borrower's ability to pay back a loan. It is calculated by dividing the borrower's net operating income (NOI) by their total debt service (TDS). The result is expressed as a ratio, with a higher ratio indicating a stronger ability to make loan payments.

For example, if a borrower has an NOI of $50,000 and TDS of $30,000, their DSCR would be 1.67 (50,000 / 30,000). This means that their net operating income is 1.67 times greater than their total debt service, indicating a strong ability to make loan payments.

Why is the DSCR important for a DSCR mortgage?

The DSCR is an important factor for lenders when considering a DSCR mortgage because it helps them determine the risk of default on the loan. A high DSCR indicates that the borrower has a strong ability to make their loan payments, which reduces the risk of default for the lender. On the other hand, a low DSCR indicates a weaker ability to make loan payments and increases the risk of default for the lender.

As a result, lenders will typically require a minimum DSCR for a DSCR mortgage. This minimum DSCR will vary depending on the lender and the specific terms of the mortgage, but a common requirement is a DSCR of 1.25 or higher.

How to calculate your DSCR value

To calculate your DSCR value, you will need to gather some financial information about your property and your business. Specifically, you will need to know your net operating income (NOI) and your total debt service (TDS).

  1. Calculate your net operating income (NOI)

To calculate your NOI, you will need to gather financial information about your property or business. Your NOI is a measure of the income generated by your property or business after deducting operating expenses, such as taxes, insurance, utilities, and maintenance.

To calculate your NOI, follow these steps:

  • Gather financial information about your property or business, including income and operating expenses.

  • Calculate your gross income by adding up all the income generated by your property or business.

  • Calculate your operating expenses by adding up all the expenses associated with operating your property or business, such as taxes, insurance, utilities, and maintenance.

  • Subtract your operating expenses from your gross income to calculate your NOI.

For example, if your property generates $100,000 in gross income and has operating expenses of $50,000, your NOI would be $50,000 (100,000 - 50,000).

  1. Calculate your total debt service (TDS)

To calculate your TDS, you will need to gather information about all the debts associated with your property or business. Your TDS is a measure of the total amount of money you owe on all your debts, including your mortgage, loans, and other liabilities.

To calculate your TDS, follow these steps:

  • Gather information about all your debts, including the amount owed, interest rate, and loan term.

  • Calculate the annual debt service for each debt by multiplying the amount owed by the interest rate and dividing by the number of payments per year.

  • Add up the annual debt service for each debt to calculate your total debt service.

For example, if you have a mortgage with a balance of $100,000, an interest rate of 5%, and a loan term of 30 years, your annual debt service would be $5,000 (100,000 * 5% / 12 payments per year). If you also have a loan with a balance of $20,000, an interest rate of 7%, and a loan term of 5 years, your annual debt service for that loan would be $3,500 (20,000 * 7% / 12 payments per year). Your total debt service would be $8,500 (5,000 + 3,500).

  1. Calculate your DSCR value

Once you have calculated your NOI and TDS, you can calculate your DSCR value by dividing your NOI by your TDS.

For example, if your NOI is $50,000 and your TDS is $30,000, your DSCR value would be 1.67 (50,000 / 30,000).

Tips for improving your DSCR value

If your DSCR value is not high enough to qualify for a DSCR mortgage, there are a few steps you can take to improve it. Here are some tips for improving your DSCR value:

  • Increase your net operating income: One way to improve your DSCR value is to increase your NOI. This can be done by increasing the income generated by your property or business or by reducing your operating expenses.

  • Pay off debt: Paying off debt can also improve your DSCR value by reducing your total debt service. Consider prioritizing the debts with the highest interest rates or shortest loan terms to maximize the impact on your DSCR value.

  • Refinance existing debts: Refinancing your existing debts can potentially reduce your interest rates and improve your DSCR value. Be sure to compare the terms and fees of different refinance options to determine which option is the most beneficial for you.

DSCR Conclusion

Understanding how to calculate your DSCR value is an important step in the process of applying for a DSCR mortgage. By following the steps outlined in this blog post, you can calculate your DSCR value and determine if you meet the lender's minimum requirements. If your DSCR value is not high enough, there are steps you can take to improve it, such as increasing your NOI, paying off debt, and refinancing existing debts. By taking these steps, you can increase your chances of securing a DSCR mortgage and achieve your financial goals.

WHAT DOES DSCR MEAN?