A DSCR (Debt Service Coverage Ratio) mortgage loan is a type of commercial real estate loan that is underwritten based on the property’s ability to generate enough income to cover the loan payments. The DSCR is a ratio that lenders use to assess the property’s ability to generate enough cash flow to cover the loan payments, including principal and interest.

Here’s how it works:

1. Calculation of DSCR: The DSCR is calculated by dividing the property’s net operating income (NOI) by the annual debt service (ADS), which includes the principal and interest payments on the loan. The formula is:
   DSCR=Net Operating IncomeDebt ServiceDSCR=Debt ServiceNet Operating Income​

   For example, if a property has an annual net operating income of $100,000 and an annual debt service of $80,000, the DSCR would be 1.25 ($100,000 / $80,000).

2. Minimum DSCR: Lenders typically require a minimum DSCR to approve a loan. This minimum ratio ensures that the property generates enough income to cover the loan payments even in the event of unexpected expenses or vacancies. A common minimum DSCR requirement is 1.25, but this can vary depending on the lender and the property type.
3. Loan Approval: When evaluating a DSCR mortgage loan application, lenders will assess the property’s income-generating potential, market conditions, and the borrower’s creditworthiness. If the property’s DSCR meets or exceeds the lender’s requirements, the loan may be approved.
4. Impact on Loan Terms: The DSCR can also impact the terms of the loan, including the interest rate, loan amount, and amortization period. A higher DSCR may result in more favorable loan terms, while a lower DSCR may lead to higher interest rates or a lower loan amount.

Overall, DSCR mortgage loans are used to finance commercial properties, such as apartment buildings, office buildings, and retail centers, where the property’s income is a key factor in determining loan eligibility and terms.