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Gold Bridge Capital Solutions DSCR Ratio Loans

DSCR Ratio & How To Calculate It

June 30, 2022

Gabriela Rosales

This Blog will explain why a DSCR loan can benefit an investor and knowing how to calculate your DSCR Ratio, can help you figure out if a Debt Service Coverage Rate Loan is right for you.

Why use a DSCR Loan?

Most real estate investors write off expenses on their properties, some may not qualify for a conventional loan. The debt service coverage ratio loan allows these individuals to qualify more easily because they don’t require proof of income via tax returns or pay stubs that investors either don’t have or that don’t represent their true income due to write-offs and business deductions. To Read more of what a DSCR Loan is, Click Here >

What Is the Debt Service Coverage Ratio (DSCR)?

The Debt Service Coverage Ratio is a ratio of a property’s annual net operating income and its annual mortgage debt, including principal and interest. Lenders use DSCR to analyze how much of a loan can be supported by the income coming from the property as well as to determine how much income coverage there will be at a specific loan amount.

What Is a Good DSCR Ratio?

Many lenders will require a 1.25 DSCR to qualify for a DSCR mortgage loan. However, Griffin Funding allows real estate investors to qualify for a loan with a DSCR as low as .75 so that they can qualify with the cash flow of your property. Please note that interest rates are better on DSCR ratios of 1 or above and that a DSCR ratio of less than 1 requires 12 months of reserves.

When considering what a good DSCR ratio is, lenders need to ensure that a borrower is able to pay back the loan.

DSCR Formula Calculation

Gold Bridge Capital Solutions DSCR Ratio and how to Calculate it

The debt service coverage ratio formula is the annual gross rental income divided by the debt obligations of the property.

Annual Gross Rental Income / Debt Obligations = Debt Service Coverage Ratio

  • To find your Gross Rental Income we take your annual rental income based on your lease agreement and the appraiser’s comparable rent schedule (form 1007) and use the lesser of the two. In some cases, if you can prove a twelve month history of rental income you can qualify off of that rather than the appraiser’s market rent.
  • Next, you’ll need to find your annual debt. Your annual debt for loan qualification purposes equals the total annual principal, interest, taxes, insurance and HOA (if applicable) payments. Annual Debt = Total Annual PITI payments
  • Next, you’ll divide your annual gross rental income by your annual debt for your ratio. DSCR = Annual gross rental income/Annual Debt

Please note that Net Operating Income (NOI), Capitalization Rate (Cap Rate), Cash on cash return (COCR), Return on Investment (ROI) are not considered for mortgage loan qualifying purposes.

Example of Debt Service Coverage Ratio Calculation

A real estate investor might be looking at a property with a gross rental income of $50,000 and an annual debt of $40,000. When you divide $50,000 by $40,000, you get a DSCR of 1.25, which means that the property generates 25% more income than what is necessary to repay the loan. This also means that there is a positive cash flow in the lender’s eye.

Why Does DSCR Matter?

The DSCR lets the lender know how to determine a borrower’s ability to pay off their DSCR mortgage. Lenders must forecast how much a real estate property can rent for so that they can predict a property’s rental value.

If you have a DSCR of less than 1.0, it means that a property has potential for negative cash flow. DSCR loans can still be made on properties with less than a 1 ratio however they usually are purchase loans with home improvements / upgrades / remodeling to be made to increase the monthly rent or for homes with high equity and potential for higher rents in the future. You also can potentially get the property above a 1.0 ratio with a DSCR interest only loan.

Non-QM Loans for Borrowers with Low DSCR

Gold Bridge Capital Solutions offers these loans for borrowers with a loa DSCR.

  • Asset-Based Loans: Asset-based mortgages are another loan product for investors who want to qualify for a loan without taking income into account. These loans allow you to use your assets instead of your income to qualify, which means you won’t have to provide a tax return or proof of income..
  • Bank Statement Loans: A bank statement loan allows investors to verify their income using bank statements instead of tax returns. These are beneficial for investors who have write-offs and deductions on their taxes that may make lenders believe that they bring in less money than they actually do each month.
  • Interest-Only Loans: Interest-only loans offer investors the option to pay lower monthly payments for the first portion of the loan. During this time, payments only apply to interest, not the principal balance.
  • Recent Credit Event Loans: A recent credit event loan allows borrowers to qualify for a loan despite recent credit events like bankruptcy, short sale, foreclosure, and divorce so that you can start rebuilding your investment portfolio as soon as possible.

Frequently Asked Questions:

What is a good DSCR?

A debt service coverage ratio of 1 or above indicates that a company is generating sufficient operating income to cover its annual debt and interest payments. As a general rule of thumb, an ideal ratio is 2 or higher. A ratio that high suggests that the company is capable of taking on more debt.

Is a high or low DSCR good?

The higher the ratio, the better, though. The higher the DSCR is, the more cash flow leeway the company has after making its annual necessary debt payments.

What is a 1.25 DSCR?

DSCR greater than 1: Your business has enough income to pay its debts, with a cushion in the event of a fluctuation in cash flow. For example, a DSCR of 1.25 means that your business makes 25% more income than it needs to cover its debts. DSCR equal to 1: All of your business’s net income is going to pay debts

Is a low DSCR good?

A high DSCR indicates that your business generates enough income to manage payments on a new loan and still make a profit. A low DSCR indicates that you may have trouble making payments on a loan, or may even have a negative cash flow. If this is the case, you may need to increase your DSCR before taking on more debt.

What is average DSCR?

Usually, most of the commercial banks look for a DSCR ratio of 1.15 to 1.35 times ensure the entity has a sufficient cash flow to repay its loans.

Why is a DSCR below 1 a problem?

A Lender is only interested and comfortable in extending the loan if the repayment of principal and interest of the proposed loan is reasonably possible. Here, when the debt service coverage ratio is less than 1, the borrower will not be able to pay that. That is why it is not a desirable situation.

Think You Want To Inquire In a loan? Contact us Today for more questions or concerns.

Gold Bridge Capital Solutions

P: 916-236-5075 or 855-501-8725

E: info@goldbridgecs.com

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