What Is Debt Service Coverage Ratio?
When a commercial or multifamily property owner applies for mortgage financing, one of the most significant factors in determining the amount of the loan is the debt service coverage ratio. (DSC) During analysis of a finance application, the loan underwriter will make economic projections of the property, beginning with forecasting property annual rental and ancillary income and then deducting annual expenses of operating the building. The result is known as the Net Operating Income (NOI), which is the amount of income generated from the rental operations of the property. The NOI is one of the two numbers used in calculating the DSC. The other number is the amount of annual debt service (loan principal plus interest) payments on the mortgage loan. The DSC ratio is determined by dividing the lenders projected NOI by the loan debt service. Minimum DSC ratios vary from lender to lender and a variety of factors are taken into consideration in determining minimum DSC ratios, such as market
