Debt Service Coverage Calculator | CB&S Bank (2024)

FAQs

How is DSCR calculated for banks? ›

The debt-service coverage ratio (DSCR) measures a firm's available cash flow to pay current debt obligations. The DSCR shows investors and lenders whether a company has enough income to pay its debts. The ratio is calculated by dividing net operating income by debt service, including principal and interest.

DSCR formula

For example, if a rental property is generating an annual NOI of $6,500 and the annual mortgage payment is $4,700 (principal and interest), the debt service coverage ratio would be: DSCR = NOI / Debt Service.

Once you have totaled all your monthly loan payments that you have or are planning to have, multiple that number by twelve in order to get your annual debt obligation. Now divide your annual EBITDA figure by your annual debt requirements. The results you come up with will either be greater or less than one.

Lenders generally want to see a DSCR of 1.25 or higher — meaning if you have a $1,000 in debt obligation, you'll need $1,250 in net operating income to qualify for a loan. A DSCR of less than one is a red flag for small business lenders.

Not all financial institutions offer debt service coverage ratio loans. However, you can get a DSCR loan at numerous banks, private lenders, and credit unions. These lenders offer DSCR loans to buy investment homes and properties, construct new properties, or renovate properties you already own.

The coverage ratio is the ratio of on-balance sheet provisions for potential credit impairment losses to the volume of non-performing loans, expressed as a percentage.

Most commercial banks and equipment finance firms want to see a minimum of 1.25x but strongly prefer something closer to 2x or more.

Can I live in a home that I buy with a DSCR loan? No, DSCR loans can only be used to purchase income-generating properties. This type of financing is suited for real estate investors rather than those seeking out a primary residence.

Getting approved for a DSCR loan can be challenging, and there may be instances where the lender may not approve your application. It's important to have a backup plan in place if this happens. You can explore other financing options such as traditional loans, private money lenders, or even equity partnerships.

How do you calculate DSCR in Excel? ›

Maximum Loan Amount Formula

For instance, the borrower's cash flow cannot dip below the min. DSCR of 1.25x. For our third credit metric, the maximum loan amount is equal to the NOI divided by the debt yield.

DSCR Formula = Net Operating Income / Total Debt service

Net operating income is calculated as a company's revenue minus its operating expenses. In most cases, lenders use net operating profit, which is the same as the net operating income. Total debt service is the current debt obligations like loans, sinking funds.

While a DSCR of 1.25 is the minimum requirement for most lenders, a higher number — such as 2 — shows lenders you are financially stable and can repay your debts. A higher DSCR can also mean a potentially lower interest rate as lenders see you as less of a risk for defaulting on your business loan.

The minimum DSCR requirements vary by lender and depend on several conditions, including the economy. If credit is more readily available, lenders may accept lower ratios. However, most lenders look for a DSCR of at least 1, but ratio requirements of 1.25 to 1.5 are the most common.

The DSCR is calculated by taking the net cash flow divided by the annual debt-service payments at the requested loan amount. If the net cash flow is insufficient to cover the requested loan at the target DSCR, then the loan amount will be constrained by the minimum DSCR.

DSCR is calculated by dividing the borrower's income, usually expressed as EBITDA, by their total debt service (principal and interest payments). The resulting ratio indicates how many times the borrower's income can cover their debt obligations.

The debt-to-equity (D/E) ratio is used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.

According to the CFI, most lenders will expect to see a DSCR of at least 1.25, but ideally, closer to 2. A better DSCR — especially paired with other indicators of financial health, such as a high business credit score — may mean a lower interest rate.