Debt Service Coverage Ratio DSCR
Debt service coverage ratio, also known as D.S. C.R., right, we’re going to go ahead and explain what this happens to mean in lending terms and how it’s helping out landlords. Owners of the property get loans done differently than they traditionally would have in the past.
And it’s kind of using commercial loans, OK for residential purposes, and it’s changing the dynamics of how this all goes on. All right. Ok, so it’s a little bit different and it’s all about like investments and how you can use retirement funds and you can diversify into this. And but DSCR is a concept.
So what we’re going to do is first start with what what it means. Ok, DSCR is debt service coverage ratio. DSCR debt service coverage ratio. So what that means is there’s a there’s a debt amount. So I’m going to use some numbers for people and this is specifically talking about investment properties.
If you’re purchasing something as an investment property, OK, what you’re going to have is how much income comes in on a monthly basis, right? And what your expense is for that property. Ok. And that’s your debt service coverage ratio. So I’m going to use a really simple, basic number and say that the amount of income that comes in is a thousand a month, so it’s like a rounded number.
So if a thousand comes in and so your income’s a thousand right and then you have expenses related to the property, OK, right. And the expenses would be everything that adds up to it. If it adds up to five hundred dollars, for example, then your debt service coverage ratio is five hundred divided by a thousand or 50 percent would be your DCR its income expenses. It’s a ratio.
Ok, debt service coverage ratio. Got it. Ok. And in that what happens is you’re able to get a loan based on the coverage ratio for the property. It’s a commercial loan, but it has to do with income and expenses, specifically just for that property. Ok. Not anything else to do with the actual borrower.
So it’s like the DTI, but It’s just for that property. Yes, just extremely similar. Ok, so DTI is debt to income ratio, but that’s for the whole. It’s for an individual right and it would talk about all of their debt. Mm hmm. And how much they have to pay. That is a minimum obligation on a monthly basis and income, how much they make divided by 12, and that’s their income ratio.
Ok. And then you have front and back end ratios for those. Ok. And this is exactly the same, except it has to do with the coverage ratio for the property desk is how much you owe every month over how much you bring in, not how much the property’s worth. Nothing to do with that.
It has nothing to do with that, but it’s really what it’s worth because that’s what the rental rate is that is bringing in each month
So the expenses such as. Everything’s included there, so that in that five hundred or whatever? Yeah. So when that five hundred what they would do is they would include everything in there. So I simplified it and just said it was five hundred. But what would happen is it would include your taxes, your utilities, a vacancy factor.
It would also include things like a realtor, expenses to release it, the property. So in that five hundred in this fictitious five hundred, it includes all of those things, plus your mortgage if you have one, right? So it adds up all those numbers. So that would be the five hundred dollars.
So tell me how the loan works then.
So how the loan works is they base it only on the property. Nothing to do with your personal stuff,
It’s only property specific. Ok, so it doesn’t matter if you own 17 other properties.
It doesn’t want to go purchase a property. Yes, and you they’re going to look at only the property,
Ok, debt service coverage ratio. But for it to actually work, it all comes down to the same things. It’s a different word on the same. On the same thing, right, is you got to put money down debt service coverage ratio and what has to happen. This property has to be in the right balance, right?
So if you have enough money down, then your debt service coverage ratio is can be correct to get it to work. Or the property appreciated and went up in value in your expenses stayed the same.
So I’m just thinking like who this would benefit right now because I think people are are purchasing at the high and I don’t know that their rental
So where it would be. So let me give you an example of where this would help somebody out would be. So what this would be is if somebody purchased a home two years ago that they’re renting out. Yeah, right. Then the rental rates went up, and now the debt service coverage ratio would be in in proper order.
Or they paid cash for it a long time ago. And now if they pay cash and they want to do a refinance?
Yeah, while you buy two of them low right
Now, buy two properties or something like that, right? Right. There’s all different ways to do it, but what it is is it’s basically taking the liability in just putting it just on that property.
So this will be good if you do have, you know, an investor or someone that you know, that owns multiple properties to just throw this out there and tell them to check it out because there’s an article for this. So we’re going to go ahead and share this article and put it out there, the landlord loan that is taking the market by storm.
So the coverage ratio, when you do it with when you get the loan from a local bank, you have so many more obstacles to overcome, right? And then typically want you to put 30 percent down or 40 percent down.
Well, times, possibly in a typical world. The local investor is supposed to know the market better, and you’re supposed to know like the pockets and is supposed to, in theory, be motivated to do business locally versus nationally, right?
And so the local bank is supposed to be able to help out a little bit more. So let’s take a look at this article and scroll down through this old car, if we can, so we would go to a commercial lender for this. Yes, this is a commercial loan. Ok, and here we go. So it is to do with one to four family rental properties until recently, but it can be used for different things. Right?
Yep. And that’s good because it states in here. Investors are often self-employed. Their tax returns are difficult to really match up. So this is helpful. Yeah, super helpful. Ok.
So it just cuts through some things. So if you have an investor, this is a term to know and to understand. So I would take a couple of minutes, research it, click on the link, look through what’s going on here and do some of your own independent research and be familiar with the concept of DCR or debt service coverage ratio. And the benefits as it relates to it.
So you as an agent are a little bit more aware. If somebody brings up a concept and you know about it, it’s going to help you out. Yeah, that’s the whole idea. And we’re trying to bring new words, new phrases to you guys all the time you hear, Wow, I love to buy this property, however I can’t.
Because then in that? Yes. And where that comes into play is when a person like self-employed people are perfect examples that their right stuff off. That’s all. Also, their income doesn’t jive with how much they spend on a monthly basis because they write it off and expense it. Right. So that is an example of where this would be possible.
Do you see this changing in residential lending that maybe this is going to be like from a residential standpoint that they’ll look at appreciation of the home instead of individual qualifying, that it’s more of a property? I don’t know. Just talking out
Loud. Yeah, they they base the thing on loans are based on property are the appraisals, the collateral. So that’s called the collateral, right? And then it’s based on who’s guaranteeing it. Right? So that that’s who has who has the obligation to repay, right? Is that other thing? But they do base it on collateral and they have to make sure the collateral is good and safe and secure.
And in the scenarios where the collateral is very substantial, then they will overlook who the individual is or things that are on there when the collateral is very, very safe. So for example, if you have a 50 percent loan, then they don’t care as much about who the person is because of collateral is so good that if there’s a problem, they can take it back and I have a problem. But it weighs heavier on.
The qualification of the person because they can always make up a difference if the lender says it’s subject to an appraisal and it comes in low, they have the ability to pay the difference. But they have to get there by their personal qualifying.
Episode Links
taxes, DTI, DSCR, lending terms, Mike Acquisto , Shana Acquisto , TNT
