A debt service coverage ratio (DSCR) loan is a type of loan that is used to finance the purchase of real estate. The DSCR is a measure of a borrower’s ability to repay the loan, and it is calculated by dividing the borrower’s net operating income (NOI) by the debt service (principal and interest payments). Lenders typically require a DSCR of at least 1.25x, which means that the borrower’s NOI must be at least 1.25 times greater than the debt service.
DSCR loans are often used by investors who are purchasing rental properties. The DSCR is an important metric for lenders because it helps them to assess the risk of default. A high DSCR indicates that the borrower has a strong ability to repay the loan, while a low DSCR indicates that the borrower is at a higher risk of default.