Debt Service Coverage Ratio in real estate lending is a ratio used by lenders to determine income property loans.
In theory debt service coverage ratio is a formula which equals net operating income divided by total debt service.
Here is an example for an investment property:
The buyer wants to borrow $80,000 at 6.5 percent for 30 years.
The monthly principal and interest payment = $505.65.
The monthly insurance is $66.67.
The monthly taxes are $208.33
The total monthly payment is $780.65
The monthly rent for this property is $1000.00
The adjusted rent (we call it a haircut equals 75% of the monthly rent) = $750.00. We allow for 25% of the monthly rent will be used to cover vacancies and repairs.
To calculate the DSCR we use the formula (adjusted rent / total monthly payment) / 100. In this example (750/780.65) / 100 = .96%