Debt Service Coverage Ratio (DSCR) loans are a type of financing typically used by real estate investors and businesses to qualify for a loan based on the property's income-producing ability, rather than the borrower's personal income. The DSCR measures the property's ability to cover its debt obligations. Lenders use this ratio to assess the risk associated with the loan; the higher the DSCR, the more income the property generates relative to its debt payments, which typically translates to a lower risk for the lender.
A DSCR loan is particularly advantageous for investors who may not have traditional income documentation but have properties with strong cash flow. The loan is approved based on the net operating income (NOI) of the property compared to its debt payments, including principal and interest. For example, a DSCR of 1.25 means the property generates 25% more income than the amount required to cover its debt payments.
These loans are common in commercial real estate but can also be used for residential investment properties. They often have flexible terms and can provide a way for investors to leverage their existing properties to acquire additional assets without the need for extensive personal financial documentation.