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The debt service coverage ratio (DSCR), known as “debt coverage ratio” (DCR), is the ratio of operating income available to debt servicing for interest, principal and lease payments. It is a popular benchmark used in the measurement of an entity’s (person or corporation) ability to produce enough cash to cover its debt (including lease) payments. The higher this ratio is, the easier it is to obtain a loan.
In commercial real estate finance, DSCR is the primary measure to determine if a property will be able to sustain its debt based on cash flow.
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The Debt Service Ratio is also typically used to evaluate the quality of a portfolio of mortgages.
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The DSCR loan is designed for Real Estate Investors who want to quality a mortgage based on cash flow generated by their investment property instead of using income proof, tax returns, employment information, etc.
Because a DSCR may quickly identify a borrower's ability to repay without requiring income verification, lenders use it to help real estate investors qualify for loans. Some real estate investors might not be eligible for a standard loan because they deduct expenses from their properties.
These real estate investors can qualify for the debt service coverage ratio loan more efficiently since they are not required to provide proof of income in the form of tax returns or pay stubs, which investors either don't have or don't accurately reflect their real income due to write-offs and business deductions.
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