Debt Service Coverage Ratio (DSCR) is a financial metric used by lenders to evaluate a borrower’s ability to pay back a loan. In order to qualify for a DSCR loan, borrowers typically need to meet the following criteria:
- Strong income: Lenders will look at the borrower’s income and cash flow to ensure that they have the ability to make their loan payments. This will typically include an analysis of the borrower’s income, expenses, and debt obligations.
- Good credit: Lenders will also look at the borrower’s credit history and credit score to determine their creditworthiness. Borrowers with a good credit history and a high credit score are more likely to qualify for a DSCR loan.
- Adequate collateral: Lenders will also look at the borrower’s assets and collateral to ensure that they have something to fall back on if the borrower is unable to repay the loan. This may include real estate, vehicles, or other assets.
- DSCR above the required level: DSCR is calculated by dividing the net operating income by the annual debt service. Lenders will typically require a DSCR of at least 1.15 to 1.25 to approve a loan, meaning that the net operating income should be at least 15-25% higher than the annual debt service.
- Business plan: Lenders will also look at the borrower’s business plan to ensure that they have a clear plan for how they will use the loan and how they will pay it back. The business plan should include details such as the expected revenue, expenses, and cash flow.
It’s worth noting that the specific requirements for a DSCR loan may vary depending on the lender and that other factors like the type of loan and the industry the borrower is in can also play a role in the loan approval process. As always, it’s a good idea to check with the lender directly to find out what their specific requirements are.