BrokeredLoans - Frequently Asked Questions

What Is Debt Service Coverage Ratio?

When a commercial or multifamily property owner applies for mortgage financing, one of the most significant factors in determining the amount of the loan is the debt service coverage ratio. (DSC)

During analysis of a finance application, the loan underwriter will make economic projections of the property, beginning with forecasting property annual rental and ancillary income and then deducting annual expenses of operating the building. The result is known as the Net Operating Income (NOI), which is the amount of income generated from the rental operations of the property. The NOI is one of the two numbers used in calculating the DSC. The other number is the amount of annual debt service (loan principal plus interest) payments on the mortgage loan.

The DSC ratio is determined by dividing the lender’s projected NOI by the loan debt service. Minimum DSC ratios vary from lender to lender and a variety of factors are taken into consideration in determining minimum DSC ratios, such as market conditions, property type, age and condition, interest rate adjustment frequency, and borrower financial strength.

Many income property lenders require a minimum DSC of 1.2 to 1.0 for multifamily and 1.25 to 1.00 for commercial. For example, with an annual debt service of $100,000, the NOI must be at least $120,000 for multifamily and 125,000 for commercial.

The significance of the DSC ratio is that the difference between the amount of NOI and the debt service amount is (1) the cash flow (return on the investment in the property) to the owner/borrower and (2) the amount of margin or "cushion" for the property to have a decrease in NOI while still at least breaking even after loan payments are made. In the eyes of the lender, the higher the DSC, and therefore the more NOI from which the owner can make debt service payments, the lesser the risk of the loan and the greater the cash flow to the owner.

BrokeredLoans.com is division of Presidential Bank, FSB, a portfolio bank and financially sound institution with assets of over $200 million. We also do other types of financing, see www.presidential.com for details.