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Financial Analysis

A key component in making an underwriting evaluation is the debt service coverage ratio (DSCR); this ratio is also frequently referred to as the debt coverage ratio (DCR). The DSCR is defined as the monthly mortgage debt compared to the net monthly income of the investment property in question. Using a DSCR of 1:1.10 a lender is saying that they are looking for a $1.10 in net income for each $1.00 mortgage payment. The higher the DSCR ratio, the more conservative the lender. Most commercial lenders will never go below a 1:1 ratio (a dollar of debt payment per dollar of net income generated). Anything less then a 1:1 ratio will result in negative cash flow situation, raising the risk of the loan for the lender. DSCR's are set by property type and what a lender perceives the risk to be. Today, apartment properties are considered to be the least risky category of investment lending. As such, commercial lenders are more inclined to use lower DCR's when evaluating a loan request. Make sure that you are familiar with a commercial lender's DSCR policy prior to depositing money on an application. Ask them to give you a preliminary review of the transaction, whether a purchase or refinance. Information is free, mistakes are not.