Question 1

What is DSCR (Debt Service Coverage Ratio)?

Accepted Answer

DSCR measures a property's ability to cover its debt payments. Formula: Net Operating Income (NOI) divided by Annual Debt Service (mortgage payments). DSCR of 1.25 means NOI covers debt with 25% buffer. Lenders require minimum DSCR to ensure loan repayment ability.

Question 2

What is the minimum DSCR for commercial loans?

Accepted Answer

Minimum DSCR varies by property type: multifamily: 1.25x, office: 1.35x, retail: 1.30x, industrial: 1.25x, hotel: 1.40x. Lenders prefer 1.25-1.50 for safety. Lower DSCR increases default risk. Some lenders approve loans at 1.0x with additional conditions or higher rates.

Question 3

How is NOI calculated for DSCR?

Accepted Answer

NOI (Net Operating Income) = Gross Rental Income minus Operating Expenses. Operating expenses include: property taxes, insurance, maintenance, property management, utilities (if landlord pays), vacancy allowance. Do NOT include mortgage payments or capital expenditures in NOI calculation.

Question 4

Can I get a DSCR loan with bad personal credit?

Accepted Answer

DSCR loans focus on property income rather than personal credit. Some lenders approve loans with DSCR 1.0+ regardless of credit score. These 'no-doc' or 'non-QM' loans are popular for investors. Rates may be higher (7-10%) and terms shorter. Personal credit still affects rates and terms.

Question 5

How can I improve my DSCR?

Accepted Answer

Increase NOI: raise rents (if market allows), reduce vacancies, cut operating costs, add income sources (parking, storage). Reduce debt service: lower loan amount, negotiate better rate, extend loan term. Lenders reward higher DSCR with better terms. Target 1.30+ for optimal financing.

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