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Can Your Borrower Repay A Small Commercial Mortgage?Understanding Debt Service Coverage Level (DSCL)

Commercial Mortgage
Posted on 
December 12, 2013

Any small commercial mortgage lender is going to want to make sure its borrowers can repay their loans. When considering financing for an investment property, lenders will calculate the debt service coverage ratio (DSCR) in order to determine whether borrowers can make their monthly payments. It’s a simple equation, and it will give you a better idea of how lenders make their decisions and whether or not your clients are going to be able to repay their loans. Here’s how to calculate the DSCR of an investment property.

  • The first thing you’ll need is the yearly rental income the borrower collects from any commercial or residential units.
  • Next, you’ll need to subtract the vacancy factor. This is to make sure your borrower has the ability to continue making payments if there is an empty unit or two in the building.
  • This will give you the adjusted gross income (AGI) of the property.
  • Once you have the AGI, you subtract any expenses the landlord is responsible for paying. These expenses can include taxes, insurance, utilities, and a number of other incidentals.
  • Additionally, you’ll need to subtract a percentage for maintenance and a percentage for management. In the event that the lender forecloses on the property, it needs to know how much it will need to pay for maintenance and to hire someone to manage the building. Each lender will probably have its own percentages. For example, APEX subtracts 3 percent for maintenance and 7 percent for management.
  • This will give you the net operating income (NOI) of the property.
  • Next, you need to divide the NOI by 1.25 (APEX’s minimum DSCR). The resulting number is the maximum annual mortgage payment that the building can support.
  • If you’d like to find out if the building can be approved for the requested loan, you’ll need to take your borrower’s monthly payment and multiply it by twelve (12). The resulting amount needs to be less than the maximum annual payment you just calculated.

Ability to repay is a key factor in any lender’s decision. As a broker, it’s important to have a good understanding of your borrower’s situation, including the capability to make payments, so that you’re not wasting the borrower’s time, the lender’s time, or your own time. Calculating the DSCR before submitting a loan scenario is a good way to decide whether to take on a client and to prepare for any issues that might arise throughout the process.


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