DSCR stands for debt service coverage ratio and refers to a loan whereby the cash inflows offset the cash expenses, preferably above 100% but not necessarily required.
The "D" is for debt, and in this case actually refers to the monthly payment that will be paid to the lender.
The letter "S" stands for service and essentially means that the D or a monthly payment will be servicing the note held by the lender.
"C", or coverage, means that the monthly payment as it is serviced will be covered by the inbound cash generated by renting the property.
And finally ratio, or "R", refers to how well that coverage is generated by the monthly rent payment from the tenants of the property.
In general, DSCR takes into account all income and expenses related to a property. The income side of the equation includes rental income, parking income, and any other income generated by the property.
The expenses side of the equation includes all of the property's operating expenses, such as property taxes, insurance, utilities, repairs and maintenance, property management fees, and any other costs associated with running and maintaining the property.
If a property is generating $1000 in rent per month and the mortgage payment is $900 and insurance and taxes are another $100 then the DSCR ratio is 1.0.
If in the same scenario the rent generated is $1100 then the DSCR ratio is 1.1. Typically loans are available with DSCR ratios as low as 0.7 however as the ratio gets higher farmers are able to borrow more and at lower rates.
DSCR loans can have many terms but usually are being looked at for 30 years. In the world of residential investment they are the closest ones to what a typical consumer mortgage loan would look like. However the rates are usually dramatically higher and have varying prepayment penalties.
It's important to note that while DSCR is a useful metric for lenders, it doesn't take into account all of the potential expenses associated with a property, such as capital expenditures for major repairs or upgrades, vacancies, or unexpected expenses. Therefore, borrowers should also consider other factors when evaluating the financial viability of a property and determining whether they can afford the loan payments