Debt service coverage ratio, also known as D.S. C.R., right, we’re going to go ahead and explain what this happens to mean in lending terms and how it’s helping out landlords. Owners of the property get loans done differently than they traditionally would have in the past.
And it’s kind of using commercial loans, OK for residential purposes, and it’s changing the dynamics of how this all goes on. All right. Ok, so it’s a little bit different and it’s all about like investments and how you can use retirement funds and you can diversify into this. And but DSCR is a concept.
So what we’re going to do is first start with what what it means. Ok, DSCR is debt service coverage ratio. DSCR debt service coverage ratio. So what that means is there’s a there’s a debt amount. So I’m going to use some numbers for people and this is specifically talking about investment properties.
If you’re purchasing something as an investment property, OK, what you’re going to have is how much income comes in on a monthly basis, right? And what your expense is for that property. Ok. And that’s your debt service coverage ratio. So I’m going to use a really simple, basic number and say that the amount of income that comes in is a thousand a month, so it’s like a rounded number.
So if a thousand comes in and so your income’s a thousand right and then you have expenses related to the property, OK, right. And the expenses would be everything that adds up to it. If it adds up to five hundred dollars, for example, then your debt service coverage ratio is five hundred divided by a thousand or 50 percent would be your DCR its income expenses. It’s a ratio.
Ok, debt service coverage ratio. Got it. Ok. And in that what happens is you’re able to get a loan based on the coverage ratio for the property. It’s a commercial loan, but it has to do with income and expenses, specifically just for that property. Ok. Not anything else to do with the actual borrower.
So it’s like the DTI, but It’s just for that property. Yes, just extremely similar. Ok, so DTI is debt to income ratio, but that’s for the whole. It’s for an individual right and it would talk about all of their debt. Mm hmm. And how much they have to pay. That is a minimum obligation on a monthly basis and income, how much they make divided by 12, and that’s their income ratio.
Ok. And then you have front and back end ratios for those. Ok. And this is exactly the same, except it has to do with the coverage ratio for the property desk is how much you owe every month over how much you bring in, not how much the property’s worth. Nothing to do with that.
It has nothing to do with that, but it’s really what it’s worth because that’s what the rental rate is that is bringing in each month
So the expenses such as. Everything’s included there, so that in that five hundred or whatever? Yeah. So when that five hundred what they would do is they would include everything in there. So I simplified it and just said it was five hundred. But what would happen is it would include your taxes, your utilities, a vacancy factor.
It would also include things like a realtor, expenses to release it, the property. So in that five hundred in this fictitious five hundred, it includes all of those things, plus your mortgage if you have one, right? So it adds up all those numbers. So that would be the five hundred dollars.
So tell me how the loan works then.
So how the loan works is they base it only on the property. Nothing to do with your personal stuff,
It’s only property specific. Ok, so it doesn’t matter if you own 17 other properties.
It doesn’t want to go purchase a property. Yes, and you they’re going to look at only the property,
Ok, debt service coverage ratio. But for it to actually work, it all comes down to the same things. It’s a different word on the same. On the same thing, right, is you got to put money down debt service coverage ratio and what has to happen. This property has to be in the right balance, right?
