What Is Debt Service Coverage Ratio for Commercial Loans?

To understand how commercial DSCR real estate loans work, you first need to know what a debt service coverage ratio (DSCR) is.

A debt service coverage ratio is a measure of a property’s available cash flow that can be used to pay servicing debt, which typically includes the total mortgage payment (including taxes, insurance, and HOA (if applicable). The DSCR is important because it shows lenders that the investment opportunity in question is financially stable and can produce enough funds to pay its debts. Griffin Funding does not use expenses such as management, maintenance, utilities, repairs, and vacancy rate when calculating DSCR for lending purposes.

The lender will calculate the DSCR to make sure that the borrower has a steady cash flow and is able to cover their new mortgage debt payments. Then they will approve or deny the loan based on their findings.

What Is a Commercial DSCR Real Estate Loan?

Commercial DSCR loans are an option for both commercial and residential real estate held in an LLC. Although it is recommended that you hold real estate in an LLC, it is not required that the property be held in an LLC as long as you can demonstrate that the loan is for business purposes. Commercial DSCR real estate loans are essentially a type of loan that are designed for real estate investors who can’t qualify for a loan based on traditional income verification methods. Instead of using their tax returns or W2s, a lender will use DSCR to qualify a borrower for the loan.

DSCR commercial real estate loans are typically easier to qualify for since real estate investors tend to write off a lot of expenses on their properties. There is also no limit on the number of financed properties a real estate investor can have in their portfolio with this type of loan.

What Types of Property Can You Use a Commercial DSCR Real Estate Loan for?

There are a variety of different types of properties that real estate investors can use commercial loans for, such as:

  • Multi-family homes
  • Office buildings
  • Retail buildings
  • Single Family Homes
  • Industrial buildings
  • Self-storage buildings
  • Hospitality buildings
  • Business properties
  • 2-4 Unit properties
  • Assisted living facilities

However, Griffin Funding only offers commercial loans on 1-4 unit residential investment properties that are used for business purposes only.

Note that commercial DSCR real estate loans cannot be used for primary residences or for personal use. The property must be for business purposes only and be an investment. These are not loans for consumers. We will lend commercial loans to natural persons as long as it is for business purposes. We also lend to LLCs or other business entities, however, the loan must be personally guaranteed. 

Why Is Debt Service Ratio Important for Commercial DSCR Loans?

DSCR is used as the primary qualification for these types of loans. 

Debt service ratio is important for commercial DSCR loans for several reasons. First, it allows borrowers to qualify based on DSCR of the property instead of their personal income, which makes these types of loans more accessible to a broader range of borrowers including self-employed individuals.

What is a Good Debt Service Coverage Ratio for Commercial Real Estate?

Typically, most lenders will require a minimum 1.25 DSCR to qualify for a loan. But if you work with Griffin Funding as your mortgage lender, you can benefit from greater flexibility. Griffin Funding accepts DSCRs as low as .75, which enables more borrowers to qualify. However, interest rates on properties will be better if your DSCR is above 1. 

Note that a DSCR less than 1 will require 12 months of reserves. 

How Do You Calculate a Loan Using DSCR?

For lending qualification purposes follow this simple formula to calculate DSCR:

Debt Service Coverage Ratio = Gross Rental Income Annual Total Debt
  • You’ll first need to calculate your gross income/rent.
  • Next, you’ll need to calculate annual debt for the property. This is the entire new mortgage payment (including Principal, interest, taxes, insurance, and HOA (if applicable).
  • Once you’ve obtained those two numbers, you can calculate your DSCR by dividing the net operating income by the annual debt.

Are DSCR Loans Good?

Whether or not using a commercial DSCR loan for a residential 1-4 unit investment property is a good idea ultimately depends on the borrower. If you want to expand your real estate portfolio, then commercial DSCR loans might be worth considering. This is especially true if you are a self-employed borrower or foreign investors—or anyone else who cannot qualify based on paystubs or W2s.

There are many benefits of DSCR loans for real estate investors, such as:

  • No limit on amount of properties
  • Typically quicker closing times
  • Unlimited cash out
  • No need to verify income to qualify
  • As little as 20% on down payments
  • Can be used for both long-term and short-term rental properties
  • Options for interest-only loans
  • Large loan amounts—up to $5,000,000
  • Close in the name of your LLC

These are all important factors to take into consideration if you’re interested in using a commercial DSCR real estate loan. 

And if you need the help getting started, speak with one of our knowledgeable loan specialists. 

Where Can You Get a DSCR Loan for Real Estate?

There are various states that Griffin Funding provides DSCR loans in, including but not limited to:

  • Alaska
  • Arizona
  • California
  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Georgia
  • Hawaii
  • Idaho
  • Illinois
  • Indiana
  • Louisiana
  • Maine
  • Maryland
  • Michigan
  • Missouri
  • Montana
  • Nevada
  • New Hampshire
  • New Jersey
  • New Mexico
  • New York
  • North Carolina
  • Ohio
  • Oklahoma
  • Oregon
  • Pennsylvania
  • South Carolina
  • Tennessee
  • Texas
  • Utah
  • Virginia
  • Washington
  • Wisconsin

Griffin Funding is a mortgage company that aims to help borrowers qualify for investment property loans so that they can build their portfolios and income. 

We’ll work with you to find a loan solution that suits your specific financial needs, so you can feel confident and comfortable with whatever the end result is. With our lending process, we’ll make qualifying for a loan as straightforward as possible, so you can be on your way to signing the final paperwork for your commercial property investment before the opportunity passes you by. 

Learn more about Griffin Funding and why so many borrowers trust us to help them secure the loans they need to take the next step in property investment.

Apply for a Commercial DSCR Loan Today

If you are interested in applying for a commercial DSCR loan today on a 1-4 unit property with Griffin Funding, you can contact us at (855) 394-8288 or (855) 651-287. You can also apply online. 

There is also a chat function on our website that you can use if you have any questions about DSCR real estate loans. With Griffin Funding, we want to make your mortgage experience as simple and straightforward as possible. Apply with Griffin Funding for your commercial DSCR real estate loan today.