Debt Service Coverage Ratio (DSCR)

DSCR is a financial metric used primarily in commercial real estate and business lending to assess an entity's ability to generate enough income to cover its debt obligations. It is calculated by dividing the net operating income (NOI) by the total debt service, which includes both principal and interest payments on any outstanding loans.

  • A DSCR greater than 1 indicates that the entity has sufficient income to cover its debt obligations, while a DSCR less than 1 suggests that the entity may struggle to meet its debt payments. For example, a DSCR of 1.2 means that the entity generates 20% more income than is necessary to cover its debt service.

  • We use DSCR to evaluate the risk associated with lending to a business or real estate investment. A higher DSCR is generally preferred as it indicates a lower risk of default. In real estate, a strong DSCR can also influence the terms of the loan, such as interest rates and loan-to-value ratios.

  • For investors and business owners, maintaining a healthy DSCR is crucial for securing financing and ensuring long-term financial stability. It reflects the entity's ability to manage its debt responsibly while continuing to invest in growth opportunities.

Guidelines

  • Minimum Credit 680.

  • Maximum LTV 75%.

  • Loans up to $3 million with a minimum of $100,000.

  • Purchase and cash-out or rate-term refinance.

  • Short-term rentals allowed (AirDNA reports accepted).

  • DSCR < 1.0 and No DSCR options available.

  • No income or employment required; qualifications based on property cash flow.

  • Max of five loans with AOMS; exceptions considered when there are more than five loans.

  • No limit on total number of financed properties a borrower can own.

  • First time home buyer (FTHB) not allowed.

  • Properties can vest title in LLC, S corp, C corp, or revocable trusts.

  • Permanent and non-permanent residents allowed.

  • Interest-only available; gift funds okay.

  • Up to 6% seller concessions.

  • Warrantable, non-warrantable, and condo hotels allowed.